Testing for trend
AbstractThe paper examines various tests for assessing whether a time series model requires a slope component. We first consider the simple t-test on the mean of first differences and show that it achieves high power against the alternative hypothesis of a stochastic nonstationary slope as well as against a purely deterministic slope. The test may be modified, parametrically or nonparametrically to deal with serial correlation. Using both local limiting power arguments and finite sample Monte Carlo results, we compare the t-test with the nonparametric tests of Vogelsang (1998) and with a modified stationarity test. Overall the t-test seems a good choice, particularly if it is implemented by fitting a parametric model to the data. When standardized by the square root of the sample size, the simple t-statistic, with no correction for serial correlation, has a limiting distribution if the slope is stochastic. We investigate whether it is a viable test for the null hypothesis of a stochastic slope and conclude that its value may be limited by an inability to reject a small deterministic slope. Empirical illustrations are provided using series of relative prices in the euro-area and data on global temperature.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 614.
Date of creation: Feb 2007
Date of revision:
CramÃ©r-von Mises distribution; stationarity test; stochastic trend; unit root; unobserved component.;
Other versions of this item:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-10 (All new papers)
- NEP-CBA-2007-03-10 (Central Banking)
- NEP-ECM-2007-03-10 (Econometrics)
- NEP-ETS-2007-03-10 (Econometric Time Series)
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