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A New Unit Root Test against Asymmetric ESTAR Nonlinearity with Smooth Breaks

Author

Listed:
  • Omid Ranjbar

    (Iran and Trade Promotion Organization, Allameh Tabataba'i University, Tehran, Iran.)

  • Tsangyao Chang

    (Department of Finance, Feng Chia University, Taichung, Taiwan.)

  • Zahra Mila Elmi

    (Faculty of Economics, University of Mazandaran, Babolsar, Iran.)

  • Chien-Chiang Lee

    (Department of Finance, National Sun Yat-sen University, Kaohsiung, Taiwan.)

Abstract

This paper proposes a new unit root test against the alternative of symmetric or asymmetric exponential smooth transition autoregressive (AESTAR) nonlinearity that accounts for multiple smooth breaks. We provide small sample properties which indicate the test statistics have good empirical size and power. Also, we compared small sample properties of the test statistics with Christopoulos and Leon-Ledesma (2010) test. The results indicate that our unit root test approach is superior to the test method of Christopoulos and Leon-Ledesma (2010) for both transition parameters (i.e. slow and fast speed), and the test power increases along with the frequency. We apply our test statistics for examining the real interest rate parity hypothesis among OECD countries.

Suggested Citation

  • Omid Ranjbar & Tsangyao Chang & Zahra Mila Elmi & Chien-Chiang Lee, 2018. "A New Unit Root Test against Asymmetric ESTAR Nonlinearity with Smooth Breaks," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(1), pages 51-62, Winter.
    • Handle: RePEc:eut:journl:v:22:y:2018:i:1:p:51
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    References listed on IDEAS

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    1. Sollis, Robert, 2009. "A simple unit root test against asymmetric STAR nonlinearity with an application to real exchange rates in Nordic countries," Economic Modelling, Elsevier, vol. 26(1), pages 118-125, January.
    2. Christopoulos, Dimitris K. & León-Ledesma, Miguel A., 2010. "Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1076-1093, October.
    3. Walter Enders & Junsoo Lee, 2012. "A Unit Root Test Using a Fourier Series to Approximate Smooth Breaks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(4), pages 574-599, August.
    4. David E. Rapach & Mark E. Wohar, 2004. "The persistence in international real interest rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 339-346.
    5. Ralf Becker & Walter Enders & Junsoo Lee, 2006. "A Stationarity Test in the Presence of an Unknown Number of Smooth Breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(3), pages 381-409, May.
    6. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
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    Cited by:

    1. Mücahit Aydın, 2019. "Investigation of the Validity of Purchasing Power Parity Hypothesis with Fourier Unit Root Tests: The Case of Turkey," EKOIST Journal of Econometrics and Statistics, Istanbul University, Faculty of Economics, vol. 30(0), pages 35-48, June.

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