Abstract

This paper proposes monitoring tests for parameter change in linear regression models with endogenous regressors. We consider a CUSUM-type test based on the instrumental variable (IV) estimation as it is a standard method for models with endogenous regressors. In addition, we also propose a test based on the residuals from the least squares (LS) estimation. We show that for a given boundary function, both tests have the same limiting distribution under the null hypothesis whereas powers are different. In particular, it turns out that when structural change occurs early in a monitoring period, the test based on the LS method tends to detect a change more rapidly than that based on the IV method.