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Detrending Bootstrap Unit Root Tests

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  • Smeekes Stephan

    (METEOR)

Abstract

The role of detrending in bootstrap unit root tests is investigated. When bootstrapping, detrending must not only be done for the construction of the test statistic, but also in the first step of the bootstrap algorithm. It is argued that the two points should be treated separately. Asymptotic validity of sieve bootstrap ADF unit root tests is shown for test statistics based on full sample and recursive OLS and GLS detrending. It is also shown that the detrending method in the first step of the bootstrap may differ from the one used in the construction of the test statistic. A simulation study is conducted to analyze the effects of detrending on finite sample performance of the bootstrap test. It is found that full sample detrending should be preferred in the first step of the bootstrap algorithm and that the decision about the detrending method used to obtain the test statistic should be based on the power properties of the corresponding asymptotic tests.

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Bibliographic Info

Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 056.

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Date of creation: 2009
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Handle: RePEc:unm:umamet:2009056

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Keywords: econometrics;

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References

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  1. Simon Broda & Kai Carstensen & Marc Paolella, 2009. "Assessing and Improving the Performance of Nearly Efficient Unit Root Tests in Small Samples," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 28(5), pages 468-494.
  2. Yoosoon Chang & Joon Park, 2002. "On The Asymptotics Of Adf Tests For Unit Roots," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(4), pages 431-447.
  3. Robert Taylor & Peter Burridge, 2004. "Bootstrapping the HEGY Seasonal Unit Root Tests," Econometric Society 2004 North American Summer Meetings, Econometric Society 125, Econometric Society.
  4. Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, Econometric Society, vol. 71(4), pages 1269-1286, 07.
  5. Paulo M. M. Rodrigues, 2004. "Properties of Recursive Trend-Adjusted Unit Root Tests," Economics Working Papers, European University Institute ECO2004/31, European University Institute.
  6. Zhijie Xiao & Peter C.B. Phillips, 1997. "An ADF Coefficient Test for a Unit Root in ARMA Models of Unknown Order with Empirical Applications to the U.S. Economy," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1161, Cowles Foundation for Research in Economics, Yale University.
  7. Giuseppe Cavaliere & A. M. Robert Taylor, 2009. "Bootstrap M Unit Root Tests," Econometric Reviews, Taylor & Francis Journals, Taylor & Francis Journals, vol. 28(5), pages 393-421.
  8. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics, Boston College Department of Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  9. Joon Y. Park, 2003. "Bootstrap Unit Root Tests," Econometrica, Econometric Society, Econometric Society, vol. 71(6), pages 1845-1895, November.
  10. Sul, Donggyu, 2009. "Panel unit root tests under cross section dependence with recursive mean adjustment," Economics Letters, Elsevier, Elsevier, vol. 105(1), pages 123-126, October.
  11. Patrick Richard, 2007. "ARMA Sieve bootstrap unit root tests," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 07-05, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke, revised Jul 2009.
  12. Palm, Franz C. & Smeekes, Stephan & Urbain, Jean-Pierre, 2007. "A Sieve Bootstrap Test for Cointegration in a Conditional Error Correction Model," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 054, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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  15. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2008. "Bootstrap Unit Root Tests For Time Series With Nonstationary Volatility," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 24(01), pages 43-71, February.
  16. David I. Harvey & Stephen J. Leybourne & A. M. Robert Taylor, 2007. "Unit root testing in practice: dealing with uncertainty over the trend and initial condition," Discussion Papers, University of Nottingham, Granger Centre for Time Series Econometrics 07/03, University of Nottingham, Granger Centre for Time Series Econometrics.
  17. Palm, Franz C. & Smeekes, Stephan & Urbain, Jean-Pierre, 2006. "Bootstrap Unit Root Tests: Comparison and Extensions," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 015, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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Cited by:
  1. Smeekes Stephan & Taylor A. M. Robert, 2010. "Bootstrap Union Tests for Unit Roots in the Presence of Nonstationary Volatility," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 015, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Joakim Westerlund, . "On the Asymptotic Distribution of the DF–GLS Test Statistic," Financial Econometics Series, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance 2014_03, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  3. Palm, Franz C. & Smeekes, Stephan & Urbain, Jean-Pierre, 2008. "Cross-Sectional Dependence Robust Block Bootstrap Panel Unit Root Tests," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 048, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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