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A Simple Modification to Improve the Finite Sample Properties of Ng and Perron’s Unit Root Tests

  • Pierre Perron

    ()

    (Department of Economics, Boston University)

  • Zhongjun Qu

    ()

    (University of Illinois at Urbana-Champaign)

The tests introduced by Ng and Perron (2001, Econometrica) have the drawback that for non-local alternatives the power can be very small. The aim of this note is to point out an easy solution to this power reversal problem, which in addition leads to tests having an exact size even closer to nominal size. It involves using OLS instead of GLS detrended data when constructing the modified information criterion.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-010.

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Length: 10pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-010
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Web page: http://www.bu.edu/econ/

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  1. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  2. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  3. Niels Haldrup & Michael Jansson, 2005. "Improving Size and Power in Unit Root Testing," Economics Working Papers 2005-02, School of Economics and Management, University of Aarhus.
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