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Markov Regime Switching and Unit-Root Tests

Author

Listed:
  • Nelson, Charles R
  • Piger, Jeremy
  • Zivot, Eric

Abstract

We investigate the power and size performance of unit-root tests when the data undergo Markov regime switching. All tests, including those robust to a single break in trend growth rate, have low power against a process with a Markov-switching trend. Under the null hypothesis, we find that previously documented size distortions in Dickey-Fuller-type tests caused by a single break in trend growth rate or variance do not generalize to most parameterizations of Markov switching in trend or variance. However, Markov switching in variance can lead to overrejection in tests allowing for a single break the level of trend.

Suggested Citation

  • Nelson, Charles R & Piger, Jeremy & Zivot, Eric, 2001. "Markov Regime Switching and Unit-Root Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(4), pages 404-415, October.
    • Handle: RePEc:bes:jnlbes:v:19:y:2001:i:4:p:404-15
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