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Power of tests for unit roots in the presence of a linear trend

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  • Bent Nielsen

    ()
    (Nuffield College, University of Oxford)

Abstract

Dickey and Fuller (1981) suggested unit root tests for an autoregressive model with a linear trend and a fixed initial value. This model has nuisance parameters so later authors have often worked with a slightly different model with a random initial value in which nuisance parameters can be eliminated by an invariant reduction of the model. This facilitates computation of envelope power functions and comparison of the relative performance of different unit root tests. It is shown here that invariance arguments also can be used when comparing power within the model with fixed initial value. Despite the apparently small difference between the two models the relative performance of unit root tests turns out to be very different.

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File URL: http://www.nuff.ox.ac.uk/economics/papers/2003/W22/nielsenpower2003.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2003-W22.

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Length: 24 pages
Date of creation: 15 Nov 2003
Date of revision:
Handle: RePEc:nuf:econwp:0322

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Web page: http://www.nuff.ox.ac.uk/economics/

Related research

Keywords: Envelope power function; maximal invariant parameter; maximal invariant statistic; most stringent test; unit root tests.;

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