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Non-normal errors or nonlinearity? performance of unit root tests

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  • Hyejin Lee
  • Mansik Hur

Abstract

This paper investigates how unit root tests that are designed for non-normal errors perform in the presence of unknown forms of nonlinearity. This allows us to examine whether any neglected nonlinearity in an estimation procedure could be reflected, at least partly, in the form of non-normality. Our simulation study shows that in general, univariate tests that exploit the information in non-normal errors remain relatively powerful compared to well-known nonlinear unit root tests under various forms of nonlinear alternatives. We also investigate the unit root properties of the real effective exchange rates and real interest rates for 60 countries. The results support the findings in the simulation that the neglected non-normality or nonlinearity in the existing tests is captured and used in the linearized testing procedures as a source of power improvement.

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  • Hyejin Lee & Mansik Hur, 2021. "Non-normal errors or nonlinearity? performance of unit root tests," Applied Economics, Taylor & Francis Journals, vol. 53(52), pages 6094-6103, November.
    • Handle: RePEc:taf:applec:v:53:y:2021:i:52:p:6094-6103
    DOI: 10.1080/00036846.2021.1937038
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    Cited by:

    1. Durmaz, Nazif & Kim, Hyeongwoo & Lee, Hyejin & Sun, Yanfei, 2023. "Trend Breaks and the Persistence of Closed-End Mutual Fund Discounts," MPRA Paper 117789, University Library of Munich, Germany.
    2. Nazif Durmaz & Hyeongwoo Kim & Hyejin Lee & Yanfei Sun, 2023. "Trend Breaks and the Persistence of Closed-End Fund Discounts," Auburn Economics Working Paper Series auwp2023-08, Department of Economics, Auburn University.

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