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Fractional Unit Root Tests Allowing for a Structural Change in Trend under Both the Null and Alternative Hypotheses

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  • Seong Yeon Chang

    (Wang Yanan Institute for Studies in Economics, Deartment of Statistics, MOE Key Laboratory of Econometrics and Fujian Key Laboratory of Statistical Science, Xiamen University, Xiamen 361005, China)

  • Pierre Perron

    (Department of Economics, Boston University, Boston, MA 02215, USA)

Abstract

This paper considers testing procedures for the null hypothesis of a unit root process against the alternative of a fractional process, called a fractional unit root test. We extend the Lagrange Multiplier (LM) tests of Robinson (1994) and Tanaka (1999), which are locally best invariant and uniformly most powerful, to allow for a slope change in trend with or without a concurrent level shift under both the null and alternative hypotheses. We show that the limit distribution of the proposed LM tests is standard normal. Finite sample simulation experiments show that the tests have good size and power. As an empirical analysis, we apply the tests to the Consumer Price Indices of the G7 countries.

Suggested Citation

  • Seong Yeon Chang & Pierre Perron, 2017. "Fractional Unit Root Tests Allowing for a Structural Change in Trend under Both the Null and Alternative Hypotheses," Econometrics, MDPI, vol. 5(1), pages 1-26, January.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:1:p:5-:d:87211
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