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GLS Detrending-Based Unit Root Tests in Nonlinear STAR and SETAR Frameworks

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  • George Kapetanios
  • Yongcheol Shin

    ()

Abstract

This paper consider the GLS detrending procedure advanced by Elliott et al. (1996) for unit root tests against alternative hypotheses where the time series data under investigation follow either globally stationary SETAR or STAR processes with deterministic components being present. It is found that the proposed testing procedures have considerable power gains against both the standard Dickey-Fuller unit root tests and existing nonlinear unit root tests recently proposed by Kapetanios and Shin (2002) and Kapetanios et al. (2003). The empirical application to DM and Yen bilateral real exchange rates against a number of other currencies also confirms that nonlinear unit root tests based on GLS detrending will be more powerful than linear ones. Interestingly, we find that the DM dataset seems to produce more rejections of the null using the GLS detrending-based SETAR tests than using the GLS detrending-based STAR tests, whereas the number of rejections of both tests are similar for the Yen dataset. The different results may arise from the respective liquidity of the DM and Yen Forex markets.

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Bibliographic Info

Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 108.

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Length: 16
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:edn:esedps:108

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Keywords: Unit Root Tests; Nonlinear STAR and SETAR Models; GLS Detrending; Real Exchange Rates.;

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  1. Dufour, Jean-Marie & King, Maxwell L., 1991. "Optimal invariant tests for the autocorrelation coefficient in linear regressions with stationary or nonstationary AR(1) errors," Journal of Econometrics, Elsevier, vol. 47(1), pages 115-143, January.
  2. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  3. Lo, Ming Chien & Zivot, Eric, 2001. "Threshold Cointegration And Nonlinear Adjustment To The Law Of One Price," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 533-576, September.
  4. Bruce E. Hansen & Mehmet Caner, 1997. "Threshold Autoregressions with a Unit Root," Boston College Working Papers in Economics 381, Boston College Department of Economics.
  5. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
  6. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  7. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  8. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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