Size distortions of tests of the null hypothesis of stationarity: Evidence and implications for applied work
AbstractIt is common in applied econometrics to test the null hypothesis of a level-stationary process against the alternative of a unit root process. We show that the use of conventional asymptotic critical values for the stationarity tests of Kwiatkowski et al. (1992) and Leybourne and McCabe (1994) may cause extreme size distortions, if the model under the null hypothesis is highly persistent. The existence of such size distortions has not been recognized in the previous literature. We illustrate the practical importance of these distortions for the problem of testing for long-run purchasing power parity under the recent float. Size distortions of tests of the unit root null hypothesis may be overcome by the use of finite-sample or bootstrap critical values. We show that such corrections are not possible for tests of the null hypothesis of stationarity. Our results suggest that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions or in spurious acceptances of the unit root hypothesis. We conclude that tests of the null hypothesis of stationarity cannot be recommended for applied work unless the sample size is very large. --
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Bibliographic InfoPaper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 12-1999.
Date of creation: 1999
Date of revision:
I(0) null hypothesis; finite-sample critical values; size; Monte Carlo simulation;
Other versions of this item:
- Mehmet Caner & Lutz Kilian, 1999. "Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for Applied Work," Computing in Economics and Finance 1999 511, Society for Computational Economics.
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- Francis X. Diebold & Lutz Kilian, 1999.
"Unit Root Tests are Useful for Selecting Forecasting Models,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
99-063, New York University, Leonard N. Stern School of Business-.
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2023, University Library of Munich, Germany, revised 2007.
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