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Testing Stationarity in Small and Medium-Sized Samples when Disturbances are Serially Correlated

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Author Info
Jönsson, Kristian () (Ministry of Finance, Stockholm, Sweden)

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Abstract

In this paper, we study the size distortions of the KPSS test for stationarity when serial correlation is present and samples are small and medium-sized. It is argued that two distinct sources of the size distortions can be identified. The first source is the finite-sample distribution of the long-run variance estimator used in the KPSS test, while the second source of the size distortions is the serial correlation not captured by the long-run variance estimator due to a too narrow choice of truncation lag parameter. When the relative importance of the two sources is studied, it is found that the size of the KPSS test can be reasonably well controlled if the finite-sample distribution of the KPSS test statistic, conditional on the time-series dimension and the truncation lag parameter, is used. Hence, finite-sample critical values, that can be applied in order to reduce the size distortions of the KPSS test, are supplied. When the power of the test is studied, it is found that the price paid for the increased size control is a lower raw power against a non-stationary alternative hypothesis.

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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2006:20.

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Length: 39 pages
Date of creation: 30 Oct 2006
Date of revision: 09 Nov 2009
Handle: RePEc:hhs:lunewp:2006_020

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Related research
Keywords: Stationarity Testing; Unit Root; Finite-Sample Inference; Long-Run Variance; Monte Carlo Simulation; Permanent Income Hypothesis; Private Consumption;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jönsson , Kristian, 2006. "Finite-Sample Stability of the KPSS Test," Working Papers 2006:23, Lund University, Department of Economics. [Downloadable!]
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