A Simple Modification to Improve the Finite Sample Properties of Ng and Perron’s Unit Root Tests
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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|Date of creation:||Feb 2006|
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- Serena Ng & Pierre Perron, 2001.
"LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power,"
Econometric Society, vol. 69(6), pages 1519-1554, November.
- Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
- 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.
- Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
- Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-783, August.
- 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.
- Tom Doan, "undated". "GLSDETREND: RATS procedure to perform local to unity GLS detrending," Statistical Software Components RTS00077, Boston College Department of Economics.
- Tom Doan, "undated". "ERSTEST: RATS procedure to perform Elliott-Rothenberg-Stock unit root tests," Statistical Software Components RTS00066, Boston College Department of Economics.
- Niels Haldrup & Michael Jansson, 2005. "Improving Size and Power in Unit Root Testing," Economics Working Papers 2005-02, Department of Economics and Business Economics, Aarhus University. Full references (including those not matched with items on IDEAS)
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