INTRODUCTION
The presence of a structural change in data that is not detected is a hazard
for applied researchers, with serious consequences for model performance and
forecasting. The structural Changepoint problems have been studied by many authors
(Chernoff and Zacks, 1964; Sen
and Srivastava, 1975; Hawkins, 1977; Yao
and Davis, 1984; Worsley, 1986; Singh
and Pandey, 2011; Jothilakshmi et al., 2011;
Kamurzzaman and Takeya, 2008). It is helpful to have
a test for structural change when the changepoint is unknown. Andrews
(1990) compared the Likelihood Ratio (LR) test with tests such as the CUSUM
and CUSUM of squares tests and the fluctuation test of Sen
(1980) and Ploberger et al. (1989) in terms
of power. Andrews (1993) determined the asymptotic
distributions of the LR test statistics under the null hypothesis of parameter
stability. In modern times the likelihood ratio test studied for the simple
linear regression models, such as Kim and Siegmund (1989)
and Kim (1994). The asymptotic results on likelihood
approach for linear models applied (Csorgo and Horvath, 1997).
Guan (2004) used empirical likelihood method which
was applied to detect the changepoint. There have also been extensive studies
on LR test problems those can found (Koroto, 2009; Aziz
et al., 2011; Midi et al., 2011).
In this study, we propose a new approach which is based on likelihood ratio type method to test the change in regression coefficient for linear model in the presence of an unknown changepoint. There are so many ways one can develop a test statistic to test for the presence of structural change when there is a possible unknown changepoint in the data. Since LR test does not have a known distribution for finite sample sizes, we estimate exact critical values for the test by simulation for different sample sizes, numbers of regressors and types of regressors.
THE MODEL
We consider the linear regression model for t = 1,…,n, with a possible change of unknown timing in one coefficient:
where, y_{t} is the dependent variable at time t, x_{t} is a kx1 vector of regressors at time t, w_{t} is a scalar variable that is of interest, β_{0} is a kx1 vector of regression coefficients and γ and δ are unknown scalar parameters. u_{t}~N(0, σ^{2}). Model (1) can be written jointly as:
where, z_{t} is a dummy variable defined as:
Denoting:
Model (2) can be rewritten in matrix form as:
Where:
TEST STATISTICS
The null hypothesis of interest is:
and the alternative hypothesis is:
The loglikelihood function of the sample under the alternative hypothesis that there is a changepoint in the data after period n_{1} is:
The loglikelihood function under the null hypothesis of no changepoint in the data is:
Differentiating (5) with respect to the parameters β_{0}, γ, δ and σ^{2}_{2} and equating the resultant equations to zero, we obtain the conditional Maximum Likelihood (ML) estimates of β_{0}, γ, δ and σ^{2}_{2} under the alternative hypothesis that there is a changepoint in the data after period n_{1} as:
Differentiating (6) with respect to the parameters β_{0}, γ and σ^{2}_{1} and equating the resultant equations to zero, we obtain the ML estimates of β_{0}, γ and σ^{2}_{1} under the null hypothesis that there is no changepoint in the data as:
Substituting the estimates of (7) into (5), we obtain the concentrated loglikelihood function under the alternative hypothesis of the sample given a changepoint in the data after period n_{1} as:
Substituting the estimated values from (8) into (6), we obtain the maximized loglikelihood function under the null hypothesis of no changepoint:
When the changepoint n_{1} is unknown, a naturally, intuitive approach
would be to estimate n_{1} and then apply the LR test at that estimate
of n_{1}. Given n_{1}, (9) is maximized by substituting in the
estimated value of σ^{2}_{2} from (7). Maximizing (9) with
respect to n_{1} is equivalent to finding the n_{1} for which
is minimum. The LR test statistic can be obtained by substituting minimum values
of
in (9) which we will denote by
and then taking twice the difference between it and the loglikelihood of (10)
that is, .
SIMULATIONS
The data y_{t} were generated from the following equation:
where, u_{t}~N(0,1), w_{t} is a scalar variable, β_{0}
is a kx1 vector of regression coefficients and γ is a constant coefficient.
The kx1 independent variables are generated following (Watson
and Engle, 1985). Monte Carlo experimental design; that is explanatory variables
(excluding the constant term) were generated from the first order autoregressive
process x_{it} = φx_{it1}+e_{it} with e_{it}~IN
(0,1) for t = 1,…,n, where φ takes values 0, 0.7, 1.0 and 1.02 which
covers white noise, autoregressive, random walk and explosive processes, respectively.
The number of regressors k was allowed to range from 1 to 15 in turn with φ
being the same for each regressor and w_{t} was generated from the uniform
distribution with range from 0 to 1. Four different sample sizes of 25, 50,
75 and 100 were used. We generated 50,000 LR test statistics for each set of
φ’s, s, k and n, then ordered the calculated LR from the lowest to
the highest values and obtained the 90th, 95th, 97th and 99th percentiles which
are the required critical values for the 10, 5, 2.5 and 1% level of significance,
respectively. Throughout, we use the GAUSS for Windows Version 3.2.35 software
to estimate the parameters of the model by the method of ML estimation. In the
model, error terms were simulated using pseudo random numbers from the GAUSS
function RNDNS that generates standard normal variate for regression errors.
The seed for the random number generator for each experiment was 1786.
RESULTS OF THE SIMULATION
Table 1 report the critical value calculation results of
the Monte Carlo simulations. We discuss the overall trends in the critical values
in four stages.
Table 1: 
Empirical critical values of the LR test for different numbers
of regressors and φ 

The first stage involves the patterns or trends with respect to sample size
variation, the second involves patterns as the number of regressors in the model
changes, the third considers changes in the type of autoregressive regressors
and the fourth discusses some general patterns with regard to the significance
level.
A noticeable feature is that the simulated critical values of the LR test increase as the sample size increases from 25 to 75 for small k = 1 and 2 and it decreases as the sample size increases from 75 to 100 at the 1% level of significance for different values of φ considered. At the 2.5, 5 and 10% levels of significance, critical values of the LR test increase as the sample size increases from 25 to 50 and they decrease as the sample size increases from 50 to 75. They decrease as n increases from 75 to 100 for the different values of φ considered. The critical values of the LR test increase as the sample size increases for k = 3 or more at different levels of significance for different values of φ.
The largest calculated critical value of the test occurs at the 1% level of significance when φ = 1.02 and n = 25 and takes the value 17.453 whereas, when n = 100 it takes the value 6.633 The largest critical values of the test at the 2.5, 5 and 10% levels of significance occur when φ = 1.02 and n = 25 and are 13.903, 11.386 and 8.995, respectively, whereas, when n = 100, the critical values are respectively, 5.615, 4.662 and 3.838. The minimum critical values of the test statistic at the 1, 2.5, 5 and 10% levels of significance occur when φ = 0 and n = 25 and are, respectively, 4.779, 3.814, 3.136 and 2.446, whereas, when n = 100 these critical values are respectively, 4.906, 4.059, 3.497 and 2.818.
The critical values of the test almost always increase with an increase in the number of regressors k. The largest increases occur for small n and for small φ. The smallest increases occur for n = 100 and for large levels of significance. For a large number of regressors in the model when φ = 0 and k = 15 at the 1, 2.5, 5 and 10% levels of significance, the maximum value of the critical values are 16.196, 12.477, 10.209 and 7.698, respectively.
The simulated critical values of the LR type test statistic appear to be practically unchanged as the type of autoregressive regressors change with everything else held constant. The critical values are typically the same for φ = 0 and for φ = 0.70 at different levels of significance and are also roughly the same for φ = 1.0 and φ = 1.02. The latter are almost always slightly bigger than the former. Obviously the critical values decrease as the level of significance increases. This decrease is largest for large k. This variation in critical values with n, k, φ and α suggests the need for formulae for critical values of the test statistic which will be developed in the next section.
CONCLUSION
While there are so many ways to develop a test statistic to test for the presence of structural change when there is a possible unknown changepoint in the data, we recommend the use of the LR test. Since this test does not have a known distribution for finite sample sizes, we estimated exact critical values for the test by simulation using 50,000 replications for different sample sizes, numbers of regressors and types of regressors. We found that the critical values clearly depend on sample size, the number of regressors and to a less extend on the type of explanatory variables. Further research direction is how to make inference about the changepoint n_{1} when parameters of the models have to be estimated.