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A simple, robust and powerful test of the trend hypothesis

  • Harvey, David I.
  • Leybourne, Stephen J.
  • Taylor, A.M. Robert

In this paper we develop a simple test procedure for a linear trend which does not require knowledge of the form of serial correlation in the data, is robust to strong serial correlation, and has a standard normal limiting null distribution under either I(0) or I(1) shocks. In contrast to other available robust linear trend tests, our proposed test achieves the Gaussian asymptotic local power envelope in both the I(0) and I(1) cases. For near- I(1) errors our proposed procedure is conservative and a modification for this situation is suggested. An estimator of the trend parameter, together with an associated confidence interval, which is asymptotically efficient, again regardless of whether the shocks are I(0) or I(1), is also provided.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 141 (2007)
Issue (Month): 2 (December)
Pages: 1302-1330

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Handle: RePEc:eee:econom:v:141:y:2007:i:2:p:1302-1330
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-54, November.
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  4. Bunzel, Helle & Vogelsang, Timothy J., 2003. "Powerful Trend Function Tests That Are Robust to Strong Serial Correlation with an Application to the Prebisch-Singer Hypothesis," Staff General Research Papers 10353, Iowa State University, Department of Economics.
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  9. Jansson, Michael, 2004. "Stationarity Testing With Covariates," Econometric Theory, Cambridge University Press, vol. 20(01), pages 56-94, February.
  10. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  11. Grilli, Enzo R & Yang, Maw Cheng, 1988. "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," World Bank Economic Review, World Bank Group, vol. 2(1), pages 1-47, January.
  12. Faust, Jon, 1996. "Near Observational Equivalence and Theoretical size Problems with Unit Root Tests," Econometric Theory, Cambridge University Press, vol. 12(04), pages 724-731, October.
  13. Eugene Canjels & Mark W. Watson, 1994. "Estimating Deterministic Trends in the Presence of Serially Correlated Errors," NBER Technical Working Papers 0165, National Bureau of Economic Research, Inc.
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  15. Lutz, Matthias G, 1999. "A General Test of the Prebisch-Singer Hypothesis," Review of Development Economics, Wiley Blackwell, vol. 3(1), pages 44-57, February.
  16. Mickael Salabasis & Sune Karlsson, 2004. "Seasonality, Cycles and Unit Roots," Econometric Society 2004 Australasian Meetings 268, Econometric Society.
  17. Benedikt M. Poetscher, 2002. "Lower Risk Bounds and Properties of Confidence Sets for Ill-Posed Estimation Problems with Applications to Spectral Density and Persistence Estimation, Unit Roots, and Estimation of Long Memory Parame," Econometrica, Econometric Society, vol. 70(3), pages 1035-1065, May.
  18. Sun, Hongguang & Pantula, Sastry G., 1999. "Testing for trends in correlated data," Statistics & Probability Letters, Elsevier, vol. 41(1), pages 87-95, January.
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