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Testing Unit Root Based on Partially Adaptive Estimation

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Author Info

  • Luiz Renato Lima

    (University of Tennessee - Knoxville)

  • Zhijie Xiao

    (Boston College)

Abstract

This paper proposes unit root tests based on partially adaptive estimation. The proposed tests provide an intermediate class of inference procedures that are more efficient than the traditional OLS-based methods and simpler than unit root tests based on fully adaptive estimation using nonparametric methods. Taking into account the well documented characteristic of heavy-tail behavior in economic and financial data, we consider unit root tests coupled with a class of partially adaptive M-estimators based on the student-t distributions, which includes the normal distribution as a limiting case. Monte Carlo experiments indicate that, in the presence of heavy tail distributions, the proposed test is more powerful than the traditional ADF test. We apply the proposed test to several macroeconomic time series that have heavy-tailed distributions. The unit root hypothesis is rejected in U.S. real GNP, supporting the literature of transitory shocks in output. However, evidence against unit root is not found in real exchange rate and nominal interest rate even when heavy-tail is taken into account.

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Bibliographic Info

Article provided by De Gruyter in its journal Journal of Time Series Econometrics.

Volume (Year): 2 (2010)
Issue (Month): 1 ()
Pages: 2

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Handle: RePEc:bpj:jtsmet:v:2:y:2010:i:1:n:2

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Related research

Keywords: C12; C5; C01; unit root; robust; M-estimation;

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  1. John Y. Campbell & N. Gregory Mankiw, 1988. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  2. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, October.
  3. Cheung, Yin-Wong & Lai, Kon S., 1997. "Bandwidth Selection, Prewhitening, and the Power of the Phillips-Perron Test," Econometric Theory, Cambridge University Press, vol. 13(05), pages 679-691, October.
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Cited by:
  1. Amélie Charles & Olivier Darné, 2010. "A note on the uncertain trend in US real GNP: Evidence from robust unit root test," Working Papers hal-00547737, HAL.

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