Modified Quasi‐Likelihood Ratio Test for Regime Switching

In this paper we propose a modified quasi‐likelihood ratio test of the null hypothesis of one regime against the alternative of two regimes in M arkov regime‐switching models. The asymptotic distribution of the proposed test statistic is a simple function of G aussian random variables, and the inference is no more complicated than in the standard case. Our simulations show that the proposed test has good finite sample size and power that are comparable to the quasi‐likelihood ratio test of C ho and W hite. We apply our test to stock returns and J apanese policy functions.