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A New Unit Root Test with Two Structural Breaks in Level and Slope at Unknown Time

  • Paresh Kumar Narayan

    ()

    (School of Accounting, Economics and Finance, Deakin University)

  • Stephan Popp

    (University of Duisburg-Essen, Germany)

In this paper we propose a new ADF-type test for unit roots which accounts for two structural breaks. We consider two different specifications: (a) two breaks in the level of a trending series; and (b) two breaks in the level and slope of trending data. The breaks whose time of occurance is assumed to be unknown are modelled as innovational outliers and thus take effect gradually. Using Monte Carlo simulations, we show that our proposed test has correct size, stable power, and identifies the structural breaks accurately.

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File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/papers/2009_11.pdf
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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Economics Series with number 2009_11.

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Date of creation: 24 Jun 2009
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Handle: RePEc:dkn:econwp:eco_2009_11
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  1. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-87, August.
  2. Perron, P., 1994. "Further Evidence on Breaking Trend Functions in Macroeconomic Variables," Cahiers de recherche 9421, Universite de Montreal, Departement de sciences economiques.
  3. Harvey, David I & Leybourne, Stephen J & Newbold, Paul, 2001. " Innovational Outlier Unit Root Tests with an Endogenously Determined Break in Level," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 559-75, December.
  4. Junsoo Lee & Mark C. Strazicich, 2004. "Minimum LM Unit Root Test with One Structural Break," Working Papers 04-17, Department of Economics, Appalachian State University.
  5. 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.
  6. Junsoo Lee & Mark C. Strazicich, 2003. "Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1082-1089, November.
  7. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May.
  8. Hall, Alastair R, 1994. "Testing for a Unit Root in Time Series with Pretest Data-Based Model Selection," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 461-70, October.
  9. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  10. Rappoport, Peter & Reichlin, Lucrezia, 1989. "Segmented Trends and Non-stationary Time Series," Economic Journal, Royal Economic Society, vol. 99(395), pages 168-77, Supplemen.
  11. Vogelsang, Timothy J & Perron, Pierre, 1998. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1073-1100, November.
  12. Lee, Junsoo & Strazicich, Mark C, 2001. " Break Point Estimation and Spurious Rejections with Endogenous Unit Root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 63(5), pages 535-58, December.
  13. George Kapetanios, 2002. "Unit Root Testing against the Alternative Hypothesis of up to m Structural Breaks," Working Papers 469, Queen Mary University of London, School of Economics and Finance.
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