Abstract

One of the most widely used models in financial economics is the first-order autoregressive 𝐴𝑅 (1) time series. This model is used in modeling stock returns, inflation, and stress testing studies of many banking risks. Due to changing economic conditions in countries, the parameters of this model change over time. Therefore, it is very important to study the stability of these model parameters over different economic regimes. To this end, the change point analysis in 𝐴𝑅 (1) series is studied and related test statistics based on martingale are derived. The asymptotic distributions of test statistics are proposed which yields the approximate p-values. However, the approximate p-values are proposed using Hansen's (1995) method. Simulations are proposed and finally a concluding section is given.