Constructing Optimal Tests on a Lagged Dependent Variable
AbstractVia the leading unit root case, the problem of testing on a lagged dependent variable is characterized by a nuisance parameter which is present only under the alternative (see Andrews and Ploberger (1994)). This has proven a barrier to the construction of optimal tests. Moreover, in their absence it is impossible to objectively assess the absolute power properties of existing tests. Indeed, feasible tests based upon the optimality criteria used here are found to have numerically superior power properties to both the original Dickey and Fuller (1981) statistics and the efficient detrended versions suggested by Elliott, Rothenberg and Stock (1996) and analysed in Burridge and Taylor (2000).
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 06/19.
Date of creation: Oct 2006
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Nuisance parameter; invariant test; unit root;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-14 (All new papers)
- NEP-ECM-2006-10-14 (Econometrics)
- NEP-ETS-2006-10-14 (Econometric Time Series)
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- Donald W.K. Andrews & Werner Ploberger, 1992.
"Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative,"
Cowles Foundation Discussion Papers
1015, Cowles Foundation for Research in Economics, Yale University.
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Econometric Society, vol. 69(6), pages 1519-1554, November.
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- Hillier, Grant H., 1987. "Classes of Similar Regions and Their Power Properties for Some Econometric Testing Problems," Econometric Theory, Cambridge University Press, vol. 3(01), pages 1-44, February.
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- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992.
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NBER Technical Working Papers
0130, National Bureau of Economic Research, Inc.
- Burridge, Peter & Taylor, A M Robert, 2000. " On the Power of GLS-Type Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 62(5), pages 633-45, December.
- Giovanni Forchini & Patrick Marsh, . "Exact Inference for the Unit Root Hypothesis," Discussion Papers 00/54, Department of Economics, University of York.
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