IDEAS home Printed from https://ideas.repec.org/p/cwl/cwldpp/944.html
   My bibliography  Save this paper

Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis

Author

Abstract

Recently Perron (1989) has carried out tests of the unit root hypothesis against the alternative hypothesis of trend stationarity with a break in the trend occurring at the Great Crash of 1929 or at the 1973 oil price shock. His analysis covers the Nelson-Plosser macroeconomic data series as well as a post-war quarter real GNP series. His tests reject the unit root null hypothesis for most of the series. This paper takes issue with the assumption used by Perron that the Great Crash and the oil price shock can be treated as exogenous events. A variation of Perron's test is considered in which the break point is estimated rather than fixed. We argue this test is more appropriate than Perron's, since it circumvents the problem of data-mining. The asymptotic distribution of the "estimated break point" test statistic is determined. The data series considered by Perron are reanalyzed using this test statistic. The empirical results make use of the asymptotics developed for the test statistic as well as extensive finite sample corrections obtained by simulation. The effect on the empirical results of fat-tailed and temporally dependent innovations is investigated. In brief, by treating the break point as endogenous, we find that there is less evidence against the unit root hypothesis than Perron finds for many of the data series, but stronger evidence against it for several of the series, including the Nelson-Plosser industrial production, nominal GNP, and real GNP series.

Suggested Citation

  • Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:944
    Note: CFP 811.
    as

    Download full text from publisher

    File URL: https://cowles.yale.edu/sites/default/files/files/pub/d09/d0944.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
    2. Christiano, Lawrence J. & Eichenbaum, Martin, 1990. "Unit roots in real GNP: Do we know, and do we care?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 7-61, January.
    3. John Y. Campbell & N. Gregory Mankiw, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 857-880.
    4. Phillips, P C B, 1988. "Reflections on Econometric Methodology," The Economic Record, The Economic Society of Australia, vol. 64(187), pages 344-359, December.
    5. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    6. Campbell, John Y & Mankiw, N Gregory, 1987. "Permanent and Transitory Components in Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 77(2), pages 111-117, May.
    7. Christiano, Lawrence J, 1992. "Searching for a Break in GNP," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 237-250, July.
    8. Peter K. Clark, 1987. "The Cyclical Component of U. S. Economic Activity," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 797-814.
    9. Perron, Pierre, 1993. "The HUMP-Shaped Behavior of Macroeconomic Fluctuations," Empirical Economics, Springer, vol. 18(4), pages 707-727.
    10. Matthew Shapiro & Mark Watson, 1988. "Sources of Business Cycles Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156, National Bureau of Economic Research, Inc.
    11. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    12. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    13. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
    14. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    15. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    16. Park, Joon Y. & Phillips, Peter C.B., 1988. "Statistical Inference in Regressions with Integrated Processes: Part 1," Econometric Theory, Cambridge University Press, vol. 4(3), pages 468-497, December.
    17. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    18. Ploberger, Werner & Kramer, Walter & Kontrus, Karl, 1989. "A new test for structural stability in the linear regression model," Journal of Econometrics, Elsevier, vol. 40(2), pages 307-318, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    2. 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.
    3. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    4. Cribari-Neto, Francisco, 1996. "On time series econometrics," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 37-60.
    5. Gil-Alana, L. A. & Robinson, P. M., 1997. "Testing of unit root and other nonstationary hypotheses in macroeconomic time series," Journal of Econometrics, Elsevier, vol. 80(2), pages 241-268, October.
    6. Javier León & Carlos Oliva, 1992. "Componente no Estacionario y la Paridad del Poder de Compra en 12 Países Latinoamericanos," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 29(88), pages 481-504.
    7. Murray, Christian J. & Nelson, Charles R., 2000. "The uncertain trend in U.S. GDP," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 79-95, August.
    8. Peter C.B. Phillips & Sam Ouliaris & Joon Y. Park, 1988. "Testing for a Unit Root in the Presence of a Maintained Trend," Cowles Foundation Discussion Papers 880, Cowles Foundation for Research in Economics, Yale University.
    9. Philip A. Shively, 2001. "Trend-stationary GNP: evidence from a new exact pointwise most powerful invariant unit root test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(4), pages 537-551.
    10. Surajit Deb, 2003. "Terms of Trade and Supply Response of Indian Agriculture: Analysis in Cointegration Framework," Working papers 115, Centre for Development Economics, Delhi School of Economics.
    11. Quah, Danny, 1992. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Econometrica, Econometric Society, vol. 60(1), pages 107-118, January.
    12. Werner Ploberger & Peter C.B. Phillips, 1998. "Rissanen's Theorem and Econometric Time Series," Cowles Foundation Discussion Papers 1197, Cowles Foundation for Research in Economics, Yale University.
    13. Hayashi, Naotsugu, 2005. "Structural changes and unit roots in Japan's macroeconomic time series: is real business cycle theory supported?," Japan and the World Economy, Elsevier, vol. 17(2), pages 239-259, April.
    14. Spencer D. Krane, 2006. "How professional forecasters view shocks to GDP," Working Paper Series WP-06-19, Federal Reserve Bank of Chicago.
    15. Perron, Pierre, 1992. "Racines unitaires en macroéconomie : le cas d’une variable," L'Actualité Economique, Société Canadienne de Science Economique, vol. 68(1), pages 325-356, mars et j.
    16. Luigi Ermini, 1993. "Shock Persistence and Stochastic Trends in Australian Aggregate Output and Consumption," The Economic Record, The Economic Society of Australia, vol. 69(1), pages 34-43, March.
    17. W A Razzak, 2007. "A Perspective on Unit Root and Cointegration in Applied Macroeconomics," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 4(1), pages 77-102.
    18. Maria Heracleous & Andreas Koutris & Aris Spanos, 2006. "Testing for Structural Breaks and other forms of Non-stationarity: a Misspecification Perspective," Computing in Economics and Finance 2006 493, Society for Computational Economics.
    19. Charles Nelson & Jeremy Piger & Eric Zivot, 1999. "Unit Root Tests in the Presence of Markov Regime-Switching," Working Papers 0040, University of Washington, Department of Economics.
    20. Peter C.B. Phillips, 1991. "Unit Roots," Cowles Foundation Discussion Papers 998, Cowles Foundation for Research in Economics, Yale University.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:944. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Matthew Regan (email available below). General contact details of provider: https://edirc.repec.org/data/cowleus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.