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On testing for unit roots and the initial observation

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  • David I. Harvey
  • Stephen J. Leybourne
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    Abstract

    Recent work has highlighted the crucial dependence of the power of existing unit root tests on the deviation of the initial observation from the deterministic component of the series. In practical applications, it is useful to have a test available with power more robust to the initial condition. In this paper, we propose such a procedure based on a data-dependent weighted average of the standard Dickey--Fuller and Elliott--Rothenberg--Stock tests. Simulation of the new test's power reveals very good performance across different magnitudes of the initial condition, and the procedure's value is further highlighted by application to U.S. producer price inflation. Copyright 2005 Royal Economic Society

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1368-423X.2005.00154.x
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    Bibliographic Info

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

    Volume (Year): 8 (2005)
    Issue (Month): 1 (03)
    Pages: 97-111

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    Handle: RePEc:ect:emjrnl:v:8:y:2005:i:1:p:97-111

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    Cited by:
    1. David I. Harvey & Stephen J. Leybourne & Nikolaos D. Sakkas, 2008. "Panel root tests and the impact of initial observations," Discussion Papers 06/02, University of Nottingham, Granger Centre for Time Series Econometrics.
    2. Elliott, Graham & Muller, Ulrich K., 2006. "Minimizing the impact of the initial condition on testing for unit roots," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 285-310.
    3. Paulo M. M. Rodrigues, 2013. "Recursive adjustment, unit root tests and structural breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 34(1), pages 62-82, 01.
    4. Ahlgren, Niklas & Juselius, Mikael, 2009. "Tests for Cointegration Rank and the Initial Condition," Working Papers 539, Hanken School of Economics.
    5. Anton Skrobotov, 2013. "Double Unit Roots Testing, GLS-detrending and Uncertainty over the Initial Conditions," Working Papers 0083, Gaidar Institute for Economic Policy, revised 2013.
    6. Yiannis Karavias & Elias Tzavalis, . "The power performance of fixed-T panel unit root tests allowing for structural breaks," Discussion Papers 13/01, University of Nottingham, Granger Centre for Time Series Econometrics.
    7. Harris, David & Harvey, David I. & Leybourne, Stephen J. & Sakkas, Nikolaos D., 2010. "Local Asymptotic Power Of The Im-Pesaran-Shin Panel Unit Root Test And The Impact Of Initial Observations," Econometric Theory, Cambridge University Press, vol. 26(01), pages 311-324, February.
    8. David I. Harvey & Stephen J. Leybourne & A. M. Robert Taylor, 2009. "The impact of the initial condition on robust tests for a linear trend," Discussion Papers 09/03, University of Nottingham, Granger Centre for Time Series Econometrics.
    9. Meng, Ming & Lee, Hyejin & Cho, Myeong Hyeon & Lee, Junsoo, 2013. "Impacts of the initial observation on unit root tests using recursive demeaning and detrending procedures," Economics Letters, Elsevier, vol. 120(2), pages 195-199.

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