This is the blog post to show how an unknown structural break can be found for any variable. Following illustration is only available in eviews 8 and onward, you can get demo version of eviews from eviews website.
Suppose you have a variable in eviews
To find the structural break you have to estimate AR(1) model in this the independent variable in the lag of dependent variable
Now go in the stability test you have multiple break-point test
There are 5 methods but go with the first one
It will tests up to 5 breaks in the data and show you the significant ones
In sequential it has provided the three break dates in the order of their significance, as we usually use one break in the model so we take 2003 as a break.
Now we open empty group edit series
Here we make a new vairable named as dum and write zeros “0” uptil 2002 and write ones “1” from 2003 and onward
This will make a structural break variable. Which can be used in any regression as an independent variable.
- Perron, Pierre (2006). “Dealing with Structural Breaks,” in Palgrave Handbook of Econometrics, Vol. 1:
Econometric Theory, T. C. Mills and K. Patterson (eds.). New York: Palgrave Macmillan.
- Eviews Manual