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How useful are tests for unit-root in distinguishing unit-root processes from stationary but non-linear processes?

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  • Chi-Young Choi
  • Young-Kyu Moh

Abstract

Standard unit-root tests are known to be biased towards the non-rejection of a unit-root when they are applied to time series with non-linear dynamics. Unfortunately, not much is known about the source of the power loss mainly because the analysis on nonstationarity and nonlinearity to this date has been fragmentary. By means of a Monte Carlo study, the current paper investigates the finite sample performance of five popular unit-root tests against a wide class of non-linear dynamic models. In contrast to the common perception, our simulation results suggest that what determines the power of unit-root tests is not the specific type of nonlinearity in the alternative model, but how far the alternative model is away from the unit-root process. The presence of nonlinearity seems immaterial to the performance of unit-root tests if the non-linear process is far away from the unit-root process, which is in line with the fact established in linear framework. Among the five tests under study, the ADF test outperforms when the sample size is relatively small while the inf-t due to Park and Shintani (2005) is more powerful for relatively large sample size regardless of the form of true models. We then illustrate the empirical relevance of our analysis by reexamining the issue of mean reversion in real interest rates, often referred to the Fisher hypothesis. Copyright Royal Economic Society 2007

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Bibliographic Info

Article provided by Royal Economic Society in its journal Econometrics Journal.

Volume (Year): 10 (2007)
Issue (Month): 1 (03)
Pages: 82-112

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Handle: RePEc:ect:emjrnl:v:10:y:2007:i:1:p:82-112

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Cited by:
  1. Kunst, Robert M., 2009. "A Nonparametric Test for Seasonal Unit Roots," Economics Series 233, Institute for Advanced Studies.
  2. Kim, Hyeongwoo & Moh, Young-Kyu, 2012. "Examining the evidence of purchasing power parity by recursive mean adjustment," Economic Modelling, Elsevier, vol. 29(5), pages 1850-1857.
  3. Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three-Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.
  4. Jinzhao Chen, 2012. "Crisis, Capital Controls and Covered Interest Parity: Evidence from China in Transformation," PSE Working Papers halshs-00660654, HAL.
  5. Daiki Maki, 2013. "Detecting cointegration relationships under nonlinear models: Monte Carlo analysis and some applications," Empirical Economics, Springer, vol. 45(1), pages 605-625, August.
  6. Robinson Kruse & Michael Frömmel & Lukas Menkhoff & Philipp Sibbertsen, 2009. "What do we know about real exchange rate non-linearities?," CREATES Research Papers 2009-50, School of Economics and Management, University of Aarhus.
  7. Belbute, José, 2013. "Does final demand for energy in Portugal exhibit long memory?," MPRA Paper 45717, University Library of Munich, Germany.
  8. Woodward, George & Brooks, Robert, 2009. "Do realized betas exhibit up/down market tendencies?," International Review of Economics & Finance, Elsevier, vol. 18(3), pages 511-519, June.
  9. Svetlana Maslyuk & Russell Smyth, 2007. "Non-Linear Unit Root Properties of Crude Oil Production," Development Research Unit Working Paper Series 39-07, Monash University, Department of Economics.
  10. Russell Smyth, 2012. "Are fluctuations in energy variables permanent or transitory? A survey of the literature on the integration properties of energy consumption and production," Development Research Unit Working Paper Series 04-12, Monash University, Department of Economics.
  11. Dilem Yildirim & Ralf Becker & Denise R Osborn, 2009. "Bootstrap Unit Root Tests for Nonlinear Threshold Models," The School of Economics Discussion Paper Series 0915, Economics, The University of Manchester.
  12. Francesco D'Amuri & Juri Marcucci, 2012. "The predictive power of Google searches in forecasting unemployment," Temi di discussione (Economic working papers) 891, Bank of Italy, Economic Research and International Relations Area.
  13. Le Pen, Yannick, 2011. "A pair-wise approach to output convergence between European regions," Economic Modelling, Elsevier, vol. 28(3), pages 955-964, May.
  14. Kisswani, Khalid/ M. & Nusair, Salah/ A., 2011. "Non-linear convergence in Asian interest rates and inflation rates," MPRA Paper 34179, University Library of Munich, Germany.
  15. repec:hal:wpaper:halshs-00660654 is not listed on IDEAS
  16. Niels Haldrup & Robinson Kruse & Timo Teräsvirta & Rasmus T. Varneskov, 2012. "Unit roots, nonlinearities and structural breaks," CREATES Research Papers 2012-14, School of Economics and Management, University of Aarhus.

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