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Two-Step LM Unit Root Tests with Trend-Breaks

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  • Junsoo Lee
  • Mark C. Strazicich
  • Ming Meng

Abstract

In this paper, we consider and examine the performance of two-step LM unit root tests with trend-breaks. In the first step, we jointly test for the existence and location of breaks using a maximum F-test. In the second step, we utilize the identified breaks and test for a unit root. A transformation procedure is adopted so that the tests with trend-breaks are invariant to nuisance parameters. We show that the two-step LM unit root tests have better properties of size and power than endogenous break unit root tests. In addition, the two-step test can be conveniently applied to allow for multiple breaks.

Suggested Citation

  • Junsoo Lee & Mark C. Strazicich & Ming Meng, 2012. "Two-Step LM Unit Root Tests with Trend-Breaks," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 1(2), pages 1-8.
    • Handle: RePEc:spt:stecon:v:1:y:2012:i:2:f:1_2_8
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