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Size and power properties of structural break unit root tests

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  • Paresh Kumar Narayan

    ()

  • Stephan Popp

    ()

Abstract

In this paper, we compare the small sample size and power properties of a newly developed endogenous structural break unit root test of Narayan and Popp (NP, 2010) with existing two break unit root tests, namely the Lumsdaine and Papell (LP, 1997) and the Lee and Strazicich (LS, 2003) tests. In contrast to the widely used LP and LS tests, the NP test chooses the break date by maximizing the significance of the break dummy coefficient. Using Monte Carlo simulations, we show that the NP test has better size and high power, and identifies the structural breaks accurately. Power and size comparisons of the NP test with the LP and LS tests reveal that the NP test is significantly superior.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/fin-econometrics/2011_07.pdf
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Bibliographic Info

Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2011_07.

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Length: 32
Date of creation: 29 Aug 2011
Date of revision:
Handle: RePEc:dkn:ecomet:fe_2011_07

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Keywords: size; power; structural breaks; unit root;

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References

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  1. Paresh Kumar Narayan & Stephan Popp, 2009. "A New Unit Root Test with Two Structural Breaks in Level and Slope at Unknown Time," Economics Series 2009_11, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  2. 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.
  3. Paresh Kumar Narayan, 2005. "New evidence on purchasing power parity from 17 OECD countries," Applied Economics, Taylor & Francis Journals, vol. 37(9), pages 1063-1071.
  4. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Working Papers 89-02, University of Washington, Department of Economics.
  5. Junsoo Lee & Mark C. Strazicich, 2013. "Minimum LM unit root test with one structural break," Economics Bulletin, AccessEcon, vol. 33(4), pages 2483-2492.
  6. Lee, Junsoo & Strazicich, Mark C, 2001. " Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 535-58, December.
  7. Paresh Kumar Narayan, 2006. "Are bilateral real exchange rates stationary? Evidence from Lagrange multiplier unit root tests for India," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 63-70.
  8. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 2001. " Innovational Outlier Unit Root Tests with an Endogenously Determined Break in Level," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 559-75, December.
  9. Nunes, Luis C & Newbold, Paul & Kuan, Chung-Ming, 1997. "Testing for Unit Roots with Breaks: Evidence on the Great Crash and the Unit Root Hypothesis Reconsidered," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(4), pages 435-48, November.
  10. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  11. Yin-Wong Cheung & Menzie Chinn, 1995. "Deterministic, stochastic and segmented trends in aggregate output: A cross-country analysis," Macroeconomics 9508005, EconWPA.
  12. Grilli, Vittorio & Kaminsky, Graciela, 1991. "Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986," Journal of Monetary Economics, Elsevier, vol. 27(2), pages 191-212, April.
  13. Kormendi, Roger C & Meguire, Philip, 1990. "A Multicountry Characterization of the Nonstationarity of Aggregate Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 77-93, February.
  14. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
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Citations

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Cited by:
  1. Tang, Chor Foon & Tan, Eu Chye, 2013. "Exploring the nexus of electricity consumption, economic growth, energy prices and technology innovation in Malaysia," Applied Energy, Elsevier, vol. 104(C), pages 297-305.
  2. Narayan, Paresh Kumar & Thuraisamy, Kannan S., 2013. "Common trends and common cycles in stock markets," Economic Modelling, Elsevier, vol. 35(C), pages 472-476.
  3. Salisu, Afees A. & Mobolaji, Hakeem, 2013. "Modeling returns and volatility transmission between oil price and US–Nigeria exchange rate," Energy Economics, Elsevier, vol. 39(C), pages 169-176.
  4. Narayan, Paresh Kumar, 2014. "Response of inflation to shocks: New evidence from Sub-Saharan African countries," Economic Modelling, Elsevier, vol. 36(C), pages 378-382.
  5. Vinod Mishra & Russell Smyth, 2014. "Unit root properties of natural gas spot and futures prices: The relevance of heteroskedasticity in high frequency data," Development Research Unit Working Paper Series 20-14, Monash University, Department of Economics.

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