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Localized Level Crossing Random Walk Test Robust to the Presence of Structural Breaks

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  • Vitali Alexeev

    () (School of Economics and Finance, University of Tasmania, Australia)

  • Alex Maynard

    () (Department of Economics, University of Guelph, Canada.)

Abstract

We propose a modified version of the nonparametric level crossing random walk test, in which the crossing level is determined locally. This modification results in a test that is robust to unknown multiple structural breaks in the level and slope of the trend function under both the null and alternative hypothesis. No knowledge regarding the number or timing of the breaks is required. An algorithm is proposed to select the degree of localization in order to maximize bootstrapped power in a proximate model. A computational procedure is then developed to adjust the critical values for the effect of this selection procedure by replicating it under the null hypothesis. The test is applied to Canadian nominal inflation and nominal interest rate series with implications for the Fisher hypothesis.

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Bibliographic Info

Paper provided by University of Guelph, Department of Economics in its series Working Papers with number 1001.

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Length: 37 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:gue:guelph:2010-01.

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Keywords: Level crossing; random walk; structural breaks; unit root; robustness;

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  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  3. Douglas J. Hodgson & Keith Vorkink, 2001. "Efficient Estimation of Conditional Asset Pricing Models," Cahiers de recherche CREFE / CREFE Working Papers 144, CREFE, Université du Québec à Montréal.
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  7. Escribano, Álvaro & Sipols, Ana E. & Aparicio, Felipe M., 2006. "Range Unit Root (RUR) Tests: Robust against Nonlinearities, Error Distributions, Structural Breaks and Outliers," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/2582, Universidad Carlos III de Madrid.
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  11. George Kapetanios, 2002. "Unit Root Testing against the Alternative Hypothesis of up to m Structural Breaks," Working Papers 469, Queen Mary, University of London, School of Economics and Finance.
  12. 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.
  13. Owen, Joel & Rabinovitch, Ramon, 1983. " On the Class of Elliptical Distributions and Their Applications to the Theory of Portfolio Choice," Journal of Finance, American Finance Association, vol. 38(3), pages 745-52, June.
  14. Kim, Dukpa & Perron, Pierre, 2009. "Unit root tests allowing for a break in the trend function at an unknown time under both the null and alternative hypotheses," Journal of Econometrics, Elsevier, vol. 148(1), pages 1-13, January.
  15. Vogelsang, T.J., 1994. "On Testing for a Unit Root in the Presence of Additive Outliers," Papers 94-30, Cornell - Department of Economics.
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