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@AricLux
Created November 21, 2020 04:46
## TESTING FOR STRUCTURAL CHANGE ----
## There appears to be structural differences in valuation during the 1920's and 1930's and then again in the last 60's
## and early 70's. Run a version of the Chow Test with dummy variables to determine if there were structural breaks.
## Define dummy variables for 20's & 30's and 60's & 70's separately. We are creating two dummy variables as we don't
## know if the nature of the structural change is the same or different for the two time periods.
df.3$D1 <- NA
df.3$D2 <- NA
for(i in 1:length(df.3$Dates)){
if(df.3$Dates[i] < 1940){
df.3$D1[i] <- 1
} else {
df.3$D1[i] <- 0
}
if(df.3$Dates[i] > 1965 & df.3$Dates[i] < 1975){
df.3$D2[i] <- 1
} else {
df.3$D2[i] <- 0
}
}
## Create Interaction terms between dummy variables and CAPE Ratio.
df.3$I1 <- df.3$CAPE*df.3$D1
df.3$I2 <- df.3$CAPE*df.3$D2
## Chow Test Model
chow_model <- lm(df.3$Annualized ~., data = df.3[ ,c(-2,-3)])
summary(chow_model)
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