Detection of outliers and level shifts in time series: An evaluation of two alternative procedures

A unified method to detect and handle innovational and additive outliers, a nd permanent and transient level changes has been presented by R. S. Tsay. N. S. Balke has found that the presence of level changes may lead to miside ntification and loss of test-power, and suggests augmenting Tsay's procedur e by conducting an additional disturbance search based on a white-noise mod el. While Tsay allows level changes to be either permanent or transient, Ba lke considers only the former type. Based on simulated series with transien t level changes this paper investigates how Balke's white-noise model perfo rms both when transient change is omitted from the model specification and when it is included. Our findings indicate that the alleged misidentificati on of permanent level changes may be influenced by the restrictions imposed by Balke. But when these restrictions are removed, Balke's procedure outpe rforms Tsay's in detecting changes in the data-generating process. Copyrigh t (C) 2000 John Wiley & Sons, Ltd.