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Cost of Misspecification in Break-Model Unit-Root Tests

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Author Info

  • Maican, Florin G.

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Sweeney, Richard J.

    ()
    (McDonough School of Business, Georgetown University)

Abstract

This paper examines power issues for the ADF and four break models (Perron 1989, Zivot and Andrews 1992) when the DGP corresponds to one of the break models. Choosing to test an incorrect break model can but need not greatly reduce the probability of rejecting the null. Break points that are relatively early in the sample period have substantial effects of increasing power. For modest shifts in time trends, simply including a time trend without shift in the model preserves power, but not for large time-trend shifts.

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File URL: http://hdl.handle.net/2077/30147
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 536.

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Length: 18 pages
Date of creation: 27 Aug 2012
Date of revision:
Handle: RePEc:hhs:gunwpe:0536

Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research

Keywords: Unit root; Monte Carlo; Break models;

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References

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  1. Maican, Florin G. & Sweeney, Richard J., 2013. "Real exchange rate adjustment in European transition countries," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 907-926.
  2. Montanes, Antonio & Olloqui, Irene & Calvo, Elena, 2005. "Selection of the break in the Perron-type tests," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 41-64.
  3. Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, vol. 71(4), pages 1269-1286, 07.
  4. Kim, Tae-Hwan & Leybourne, Stephen J & Newbold, Paul, 2000. " Spurious Rejections by Perron Tests in the Presence of a Break," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(3), pages 433-44, July.
  5. 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.
  6. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  8. Hecq, Alain & Urbain, Jean-Pierre, 1993. "Misspecification tests, unit roots and level shifts," Economics Letters, Elsevier, vol. 43(2), pages 129-135.
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Cited by:
  1. Maican, Florin G. & Sweeney, Richard J., 2013. "Rejection Probabilities for a Battery of Unit-Root Tests," Working Papers in Economics 568, University of Gothenburg, Department of Economics.

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