Unit root tests are frequently used to test long-run economic relationships. However, many of these relationships are not expected to follow simple time-series processes due to transaction costs boundaries or thresholds. This paper finds that the power of unit root tests in detecting long-run equilibrium relationships can be significantly diminished by the existence of transaction costs. The authors' results call into question the efficacy of unit root tests in the presence of transactions costs. Copyright 1993 by Blackwell Publishing Ltd
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