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The Chow test, proposed by econometrician Gregory Chow in 1960, is a test of whether the true coefficients in two linear regressions on different data sets are equal. In econometrics, it is most commonly used in time series analysis to test for the presence of a structural break at a period which can be assumed to be known a priori (for instance, a major historical event such as a war). In program evaluation, the Chow test is often used to determine whether the independent variables have different impacts on different subgroups of the population.

Contents

IllustrationsEdit

Applications of the Chow test
Structural break (slopes differ) Program evaluation (intercepts differ)
   
At   there is a structural break; separate regressions on the subintervals   and   delivers a better model than the combined regression (dashed) over the whole interval. Comparison of two different programs (red, green) in a common data set: separate regressions for both programs deliver a better model than a combined regression (black).

Mathematical detailsEdit

Suppose that we model our data as

 

If we split our data into two groups, then we have

 

and

 

The null hypothesis of the Chow test asserts that  ,  , and  , and there is the assumption that the model errors   are independent and identically distributed from a normal distribution with unknown variance.

Let   be the sum of squared residuals from the combined data,   be the sum of squared residuals from the first group, and   be the sum of squared residuals from the second group.   and   are the number of observations in each group and   is the total number of parameters (in this case, 3). Then the Chow test statistic is

 

The test statistic follows the F distribution with   and   degrees of freedom.

Remarks

  • The global sum of squares (SSE) is often called the Restricted Sum of Squares (RSSM) as we basically test a constrained model where we have   assumptions (with   the number of regressors).
  • Some software like SAS will use a predictive Chow test when the size of a subsample is less than the number of regressors.

ReferencesEdit

  • Chow, Gregory C. (1960). "Tests of Equality Between Sets of Coefficients in Two Linear Regressions". Econometrica. 28 (3): 591–605. doi:10.2307/1910133. JSTOR 1910133.
  • Doran, Howard E. (1989). Applied Regression Analysis in Econometrics. CRC Press. p. 146. ISBN 978-0-8247-8049-4.
  • Dougherty, Christopher (2007). Introduction to Econometrics. Oxford University Press. p. 194. ISBN 978-0-19-928096-4.
  • Kmenta, Jan (1986). Elements of Econometrics (Second ed.). New York: Macmillan. pp. 412–423. ISBN 978-0-472-10886-2.
  • Wooldridge, Jeffrey M. (2009). Introduction to Econometrics: A Modern Approach (Fourth ed.). Mason: South-Western. pp. 243–246. ISBN 978-0-324-66054-8.

External linksEdit