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Fixed and Recursive Right-Tailed Dickey–Fuller Tests in the Presence of a Break under the Null

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  • Sollis Robert

    (Newcastle University Business School, Newcastle University, 5 Barrack Road, Newcastle upon Tyne NE1 4SE, UK)

Abstract

Right-tailed Dickey–Fuller-type unit root tests against the explosive alternative have become popular in economics and finance for detecting asset price bubbles. This paper studies the size properties of fixed sample and recursive right-tailed Dickey–Fuller tests if the relevant series contains a unit root, but a structural break in the drift parameter occurs. It is shown that positive size distortion and therefore spurious rejections of the unit root null hypothesis in favour of the explosive alternative can be a problem for both types of test. Some possible solutions to this problem are briefly discussed.

Suggested Citation

  • Sollis Robert, 2016. "Fixed and Recursive Right-Tailed Dickey–Fuller Tests in the Presence of a Break under the Null," Journal of Time Series Econometrics, De Gruyter, vol. 8(1), pages 1-19, January.
    • Handle: RePEc:bpj:jtsmet:v:8:y:2016:i:1:p:1-19:n:1
    DOI: 10.1515/jtse-2013-0004
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    References listed on IDEAS

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    1. Bettendorf, Timo & Chen, Wenjuan, 2013. "Are there bubbles in the Sterling-dollar exchange rate? New evidence from sequential ADF tests," Economics Letters, Elsevier, vol. 120(2), pages 350-353.
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    Cited by:

    1. Skrobotov Anton, 2023. "Testing for explosive bubbles: a review," Dependence Modeling, De Gruyter, vol. 11(1), pages 1-26, January.

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    More about this item

    Keywords

    explosive autoregression; structural break; unit root;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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