##### Question

# The Chow test is based on two assumptions. You suspect that the assumption that the error variance is the same for the 2 periods, does not hold. The result being that the Chow test is not appropriate…

The Chow test is based on two assumptions. You suspect that the

assumption that the error variance is the same for the 2 periods,

does not hold. The result being that the Chow test is not

appropriate to test for structural breaks in our data. Test if the

assumption of equal error variance holds. (What is expected of

me?)

## Solutions

##### Expert Solution

The Chow test tells us whether the

regression coefficients are different for split data sets.

Basically, it tests whether one regression line or two separate

regression lines best fit a split set of data.

There are two assumptions of Chow

test:

1. Error variance is the same for

the 2 periods

2. There exists a structural change

in the data.

The question says that there do not

exist a structural change in the data and you have to test whether

the error variance is the same for 2 periods.