Local Weighting Matrices or the Necessity of Flexibility

The difficulties caused by the lack of stability in the parameters of an econometric model are well known: biased and inconsistent estimators, misleading tests and, in general, wrong inference. The list of consequences explains the attention that the literature on mainstream Econometrics has dedicated to the problem. The first formal test of parameter stability was due to Chow (1960), considering only one break point known a priori. Since then, the detection of structural breaks has received substantial attention in the discipline.