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Bootstrap Unit Root Tests For Time Series With Nonstationary Volatility

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  • Cavaliere, Giuseppe
  • Taylor, A.M. Robert

Abstract

The presence of permanent volatility shifts in key macroeconomic and financial variables in developed economies appears to be relatively common. Conventional unit root tests are unreliable in the presence of such behavior, having nonpivotal asymptotic null distributions. In this paper we propose a bootstrap approach to unit root testing that is valid in the presence of a wide class of permanent variance changes that includes single and multiple (abrupt and smooth transition) volatility change processes as special cases. We make use of the so-called wild bootstrap principle, which preserves the heteroskedasticity present in the original shocks. Our proposed method does not require the practitioner to specify any parametric model for the volatility process. Numerical evidence suggests that the bootstrap tests perform well in finite samples against a range of nonstationary volatility processes.We thank two anonymous referees, Paulo Rodrigues, Peter Phillips, and seminar participants at the URCT conference held in Faro, Portugal, September 29 to October 1, 2005, for helpful comments on previous versions of this paper.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Econometric Theory.

Volume (Year): 24 (2008)
Issue (Month): 01 (February)
Pages: 43-71
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:etheor:v:24:y:2008:i:01:p:43-71_08

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Cited by:
  1. Smeekes Stephan & Taylor A. M. Robert, 2010. "Bootstrap Union Tests for Unit Roots in the Presence of Nonstationary Volatility," Research Memoranda 015, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  2. Giuseppe Cavaliere & David I. Harvey & Stephen J. Leybourne & A. M. Robert Taylor, 2009. "Testing for unit roots in the presence of a possible break in trend and non-stationary volatility," Discussion Papers 09/05, University of Nottingham, Granger Centre for Time Series Econometrics.
  3. Patrick Marsh, . "Saddlepoint Approximations for Optimal Unit Root Tests," Discussion Papers 09/31, Department of Economics, University of York.
  4. Giuseppe Cavaliere & Anders Rahbek & A.M.Robert Taylor, 2009. "Co-integration Rank Testing under Conditional Heteroskedasticity," CREATES Research Papers 2009-22, School of Economics and Management, University of Aarhus.
  5. Guiseppe Cavaliere & Anders Rahbek & A.M.Robert Taylor, 2010. "Bootstrap Sequential Determination of the Co-integration Rank in VAR Models," CREATES Research Papers 2010-07, School of Economics and Management, University of Aarhus.
  6. Brendan K. Beare, 2008. "Unit Root Testing with Unstable Volatility," Economics Papers 2008-W06, Economics Group, Nuffield College, University of Oxford.
  7. Cavaliere Giuseppe & Phillips Peter C.B. & Smeekes Stephan & Taylor A.M. Robert, 2011. "Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility," Research Memoranda 056, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  8. Herwartz, Helmut & Siedenburg, Florian, 2009. "The effects of variance breaks on homogenous panel unit root tests," Economics Working Papers 2009,07, Christian-Albrechts-University of Kiel, Department of Economics.
  9. Smeekes Stephan, 2009. "Detrending Bootstrap Unit Root Tests," Research Memoranda 056, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  10. Giuseppe Cavaliere & Anders Rahbek & A.M.Robert Taylor, 2008. "Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility," CREATES Research Papers 2008-50, School of Economics and Management, University of Aarhus.
  11. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2009. "Co-integration rank tests under conditional heteroskedasticity," Discussion Papers 09/02, University of Nottingham, Granger Centre for Time Series Econometrics.
  12. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, Robert, 2010. "Determination of the Number of Common Stochastic Trends Under Conditional Heteroskedasticity/Determinación del número de tendencias estocásticas comunes bajo heteroscedasticidad condicional," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 28, pages 519-552, Diciembre.

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