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Effects of Applying Linear and Nonlinear Filters on Tests for Unit Roots with Additive Outliers

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Author Info

  • Miguel A. Arranz
  • Alvaro Escribano
  • Francesc Mármol

Abstract

Conventional univariate Dickey-Fuller tests tend to produce spurious stationarity when there exist additive outlying observations in the time series. Correct critical values are usually obtained by adding dummy variables to the Dickey-Fuller regression. This is a nice theoretical result but not attractive from the empirical point of view since almost any result can be obtained just by a convenient selection of dummy variables. In this paper we suggest a robust procedure based on running Dickey-Fuller tests on the trend component instead of the original series. We provide both finite-sample and large-sample justifications. Practical implementation is illustrated through an empirical example based on the US/Finland real exchange rate series.

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File URL: http://e-archivo.uc3m.es/bitstream/10016/5782/1/we_2000_86.pdf
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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we20091101.

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Date of creation: Sep 2002
Date of revision: Nov 2009
Handle: RePEc:cte:werepe:we20091101

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Related research

Keywords: Additive outliers; Dickey-Fuller test; Linear and nonlinear filtering; Bootstrap;

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Cited by:
  1. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.

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