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

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Author Info
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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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
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Handle: RePEc:edn:esedps:108

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

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange

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