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A class of Simple Semiparametrically Efficient Rank-Based Unit Root Tests

Listed author(s):
  • Marc Hallin
  • Ramon van den Akker
  • Bas Werker

We propose a class of simple rank-based tests for the null hypothesis of a unit root. This class is indexed by the choice of a reference density g, which needs not coincide with the unknown actual innovation density f. The validity of these tests, in terms of exact finite sample size, is guaranteed by distribution-freeness, irrespective of the value of the drift and the actual underlying f. When based on a Gaussian reference density g, our tests (of the van der Waerden form) perform uniformly better, in terms of asymptotic relative effciency, than the Dickey and Fuller test --except under Gaussian f, where they are doing equally well. Under Student t3 density f, the effciency gain is as high as 110%, meaning that Dickey-Fuller requires over twice as many observations as we do in order to achieve comparable performance. This gain is even larger in case the underlying f has fatter tails; under Cauchy f, where Dickey and Fuller is no longer valid, it can be considered infinite. The test associated with reference density g is semiparametrically e±cient when f happens to coincide with g, in the ubiquitous case that the model contains a non-zero drift. Finally, with an estimated density f(n) substituted for the reference density g, our tests achieve uniform (with respect to f) semiparametric efficiency.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/54112/1/RePEc_eca_wpaper_2009_001.pdf
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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number 2009_001.

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Length: 23 p.
Date of creation: 2009
Publication status: Published by:
Handle: RePEc:eca:wpaper:2009_001
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