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An infimum coefficient unit root test allowing for an unknown break in trend

  • Harvey, David I.
  • Leybourne, Stephen J.
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    In this paper we consider testing for a unit root in the possible presence of a trend break at an unknown time. Zivot and Andrews (1992) [Journal of Business and Economic Statistics 10, 251–270] proposed using the infimum of t-ratio Dickey–Fuller statistics across all candidate break points in a trimmed range, however this procedure can have an asymptotic size of one when a break occurs under the unit root null. We show that if the same approach is used, but instead with coefficient Dickey–Fuller statistics in an additive outlier framework, the test is asymptotically conservative when a break is present under the null, provided the degree of trimming is appropriately controlled. The test is also shown to have superior local asymptotic power to the t-ratio version.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0165176512002911
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    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 117 (2012)
    Issue (Month): 1 ()
    Pages: 298-302

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    Handle: RePEc:eee:ecolet:v:117:y:2012:i:1:p:298-302
    Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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    1. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
    2. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    3. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche 9422, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    4. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    5. Yoosoon Chang & Joon Park, 2002. "On The Asymptotics Of Adf Tests For Unit Roots," Econometric Reviews, Taylor & Francis Journals, vol. 21(4), pages 431-447.
    6. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    7. Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, vol. 71(4), pages 1269-1286, 07.
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