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Correcting size distortion of the Dickey-Fuller test via recursive mean adjustment

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  • Cook, Steven
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    Abstract

    Leybourne et al. (J. Econom. 87 (1998) 191) have shown the Dickey-Fuller (J. Amer. Statist. Assoc. 74 (1979) 427) unit root test to suffer from severe oversizing in the presence of level breaks. In this paper it is shown that recursive mean adjustment can correct this distortion, even for large breaks.

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    File URL: http://www.sciencedirect.com/science/article/B6V1D-47254MD-7/2/844151114c4e4abdde3285bf8172c56e
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    Bibliographic Info

    Article provided by Elsevier in its journal Statistics & Probability Letters.

    Volume (Year): 60 (2002)
    Issue (Month): 1 (November)
    Pages: 75-79

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    Handle: RePEc:eee:stapro:v:60:y:2002:i:1:p:75-79

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    Related research

    Keywords: Recursive mean adjustment Unit root test Structural breaks Monte Carlo methods;

    References

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    1. Davidson, Russell & MacKinnon, James G, 1998. "Graphical Methods for Investigating the Size and Power of Hypothesis Tests," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(1), pages 1-26, January.
    2. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    3. Perron, P., 1989. "Testing For A Unit Root In A Time Series With A Changing Mean," Papers 347, Princeton, Department of Economics - Econometric Research Program.
    4. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, vol. 65(3), pages 395-432, July.
    5. Pantula, Sastry G & Gonzalez-Farias, Graciela & Fuller, Wayne A, 1994. "A Comparison of Unit-Root Test Criteria," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 449-59, October.
    6. Leybourne, Stephen J. & C. Mills, Terence & Newbold, Paul, 1998. "Spurious rejections by Dickey-Fuller tests in the presence of a break under the null," Journal of Econometrics, Elsevier, vol. 87(1), pages 191-203, August.
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    Cited by:
    1. 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.
    2. Hyeongwoo Kim & Nazif Durmaz, 2010. "Bias Correction and Out-of-Sample Forecast Accuracy," Auburn Economics Working Paper Series auwp2010-02, Department of Economics, Auburn University.
    3. 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.
    4. Cook, Steven & Vougas, Dimitrios, 2004. "On the finite-sample size distortion of smooth transition unit root tests," Statistics & Probability Letters, Elsevier, vol. 70(3), pages 175-182, December.

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