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Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis

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Abstract

Recently Perron (1989) has carried out tests of the unit root hypothesis against the alternative hypothesis of trend stationarity with a break in the trend occurring at the Great Crash of 1929 or at the 1973 oil price shock. His analysis covers the Nelson-Plosser macroeconomic data series as well as a post-war quarter real GNP series. His tests reject the unit root null hypothesis for most of the series. This paper takes issue with the assumption used by Perron that the Great Crash and the oil price shock can be treated as exogenous events. A variation of Perron's test is considered in which the break point is estimated rather than fixed. We argue this test is more appropriate than Perron's, since it circumvents the problem of data-mining. The asymptotic distribution of the "estimated break point" test statistic is determined. The data series considered by Perron are reanalyzed using this test statistic. The empirical results make use of the asymptotics developed for the test statistic as well as extensive finite sample corrections obtained by simulation. The effect on the empirical results of fat-tailed and temporally dependent innovations is investigated. In brief, by treating the break point as endogenous, we find that there is less evidence against the unit root hypothesis than Perron finds for many of the data series, but stronger evidence against it for several of the series, including the Nelson-Plosser industrial production, nominal GNP, and real GNP series.

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File URL: http://cowles.econ.yale.edu/P/cd/d09a/d0944.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 944.

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Length: 52 pages
Date of creation: May 1990
Date of revision:
Publication status: Published in Journal of Business and Economic Statistics (July 1992), 10(3): 251-270
Handle: RePEc:cwl:cwldpp:944

Note: CFP 811.
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Keywords: Asymptotic distribution; break point; Gaussian process; macroeconomic time series; structural change; test statistic; time trend; trend stationary; unit root hypothesis; weak convergence;

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  1. Lawrence J. Christiano & Martin Eichenbaum, 1989. "Unit Roots in Real GNP: Do We Know, and Do We Care?," NBER Working Papers 3130, National Bureau of Economic Research, Inc.
  2. John Y. Campbell & N. Gregory Mankiw, 1988. "Are Output Fluctuations Transitory?," NBER Working Papers 1916, National Bureau of Economic Research, Inc.
  3. Campbell, John Y & Mankiw, N Gregory, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 77(2), pages 111-17, May.
  4. 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.
  5. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, vol. 40(2), pages 307-318, February.
  6. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  7. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  8. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," Cowles Foundation Discussion Papers 870, Cowles Foundation for Research in Economics, Yale University.
  9. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  10. Park, Joon Y. & Phillips, Peter C.B., 1988. "Statistical Inference in Regressions with Integrated Processes: Part 1," Econometric Theory, Cambridge University Press, vol. 4(03), pages 468-497, December.
  11. Lawrence J. Christiano, 1988. "Searching For a Break in GNP," NBER Working Papers 2695, National Bureau of Economic Research, Inc.
  12. Peter C.B. Phillips, 1988. "Reflections on Econometric Methodology," Cowles Foundation Discussion Papers 893, Cowles Foundation for Research in Economics, Yale University.
  13. Perron, Pierre, 1993. "The HUMP-Shaped Behavior of Macroeconomic Fluctuations," Empirical Economics, Springer, vol. 18(4), pages 707-27.
  14. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  15. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
  16. Clark, Peter K, 1987. "The Cyclical Component of U.S. Economic Activity," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 797-814, November.
  17. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
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