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Bootstrap union tests for unit roots in the presence of nonstationary volatility

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  • Stephan Smeekes
  • A. M. Robert Taylor

Abstract

We provide a joint treatment of three major issues that surround testing for a unit root in practice: uncertainty as to whether or not a linear deterministic trend is present in the data, uncertainty as to whether the initial condition of the process is (asymptotically) negligible or not, and the possible presence of nonstationary volatility in the data. Harvey, Leybourne and Taylor (2010, Journal of Econometrics, forthcoming) propose decision rules based on a four-way union of rejections of QD and OLS detrended tests, both with and without allowing for a linear trend, to deal with the first two problems. However, in the presence of nonstationary volatility these test statistics have limit distributions which depend on the form of the volatility process, making tests based on the standard asymptotic critical values invalid. We construct bootstrap versions of the four-way union of rejections test, which, by employing the wild bootstrap, are shown to be asymptotically valid in the presence of nonstationary volatility. These bootstrap union tests therefore allow for a joint treatment of all three of the aforementioned problems.

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Bibliographic Info

Paper provided by University of Nottingham, Granger Centre for Time Series Econometrics in its series Discussion Papers with number 10/03.

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Date of creation: Feb 2010
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Handle: RePEc:not:notgts:10/03

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Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
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Web page: http://www.nottingham.ac.uk/economics/grangercentre/
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Keywords: Unit root; local trend; initial condition; asymptotic power; union of rejections decision rule; nonstationary volatility; wild bootstrap;

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  1. Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2009. "Unit Root Testing In Practice: Dealing With Uncertainty Over The Trend And Initial Condition," Econometric Theory, Cambridge University Press, vol. 25(03), pages 587-636, June.
  2. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2009. "Heteroskedastic Time Series With A Unit Root," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1228-1276, October.
  3. Anders Rygh Swensen, 2003. "Bootstrapping unit root tests for integrated processes," Journal of Time Series Analysis, Wiley Blackwell, vol. 24(1), pages 99-126, 01.
  4. Palm, Franz C. & Smeekes, Stephan & Urbain, Jean-Pierre, 2006. "Bootstrap Unit Root Tests: Comparison and Extensions," Research Memorandum 015, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Joseph P. Romano & Michael Wolf, 2003. "Stepwise Multiple Testing as Formalized Data Snooping," Working Papers 17, Barcelona Graduate School of Economics.
  6. Smeekes Stephan, 2009. "Detrending Bootstrap Unit Root Tests," Research Memorandum 056, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  7. Yoosoon Chang & Joon Y. Park, 2003. "A Sieve Bootstrap For The Test Of A Unit Root," Journal of Time Series Analysis, Wiley Blackwell, vol. 24(4), pages 379-400, 07.
  8. Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2009. "Rejoinder," Econometric Theory, Cambridge University Press, vol. 25(03), pages 658-667, June.
  9. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  10. Efstathios Paparoditis & Dimitris N. Politis, 2003. "Residual-Based Block Bootstrap for Unit Root Testing," Econometrica, Econometric Society, vol. 71(3), pages 813-855, 05.
  11. Parker, Cameron & Paparoditis, Efstathios & Politis, Dimitris N., 2006. "Unit root testing via the stationary bootstrap," Journal of Econometrics, Elsevier, vol. 133(2), pages 601-638, August.
  12. Pierre Perron & Zhongjun Qu, 2006. "A Simple Modification to Improve the Finite Sample Properties of Ng and Perron’s Unit Root Tests," Boston University - Department of Economics - Working Papers Series WP2006-010, Boston University - Department of Economics.
  13. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
  14. Elliott, Graham & Muller, Ulrich K., 2006. "Minimizing the impact of the initial condition on testing for unit roots," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 285-310.
  15. 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.
  16. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2007. "Testing for unit roots in time series models with non-stationary volatility," Journal of Econometrics, Elsevier, vol. 140(2), pages 919-947, October.
  17. Giuseppe Cavaliere & A. M. Robert Taylor, 2009. "Bootstrap M Unit Root Tests," Econometric Reviews, Taylor & Francis Journals, vol. 28(5), pages 393-421.
  18. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2008. "Bootstrap Unit Root Tests For Time Series With Nonstationary Volatility," Econometric Theory, Cambridge University Press, vol. 24(01), pages 43-71, February.
  19. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  20. Paparoditis, Efstathios & Politis, Dimitris N., 2005. "Bootstrapping Unit Root Tests for Autoregressive Time Series," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 545-553, June.
  21. Christian Bayer & Christoph Hanck, 2013. "Combining non-cointegration tests," Journal of Time Series Analysis, Wiley Blackwell, vol. 34(1), pages 83-95, 01.
  22. Park, Joon Y., 2002. "An Invariance Principle For Sieve Bootstrap In Time Series," Econometric Theory, Cambridge University Press, vol. 18(02), pages 469-490, April.
  23. Yoosoon Chang & Joon Park, 2002. "On The Asymptotics Of Adf Tests For Unit Roots," Econometric Reviews, Taylor & Francis Journals, vol. 21(4), pages 431-447.
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Cited by:
  1. Cavaliere Giuseppe & Phillips Peter C.B. & Smeekes Stephan & Taylor A.M. Robert, 2011. "Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility," Research Memorandum 056, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Joakim Westerlund & Paresh Kumar Narayan, . "Testing for Predictability in Conditionally Heteroskedastic Stock Returns," Financial Econometics Series 2014_01, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  3. Smeekes Stephan, 2011. "Bootstrap Sequential Tests to Determine the Stationary Units in a Panel," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. 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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