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Markov regime switching and unit root tests

Listed author(s):
  • Charles R. Nelson
  • Eric Zivot
  • Jeremy M. Piger

We investigate the power and size performance of unit root tests when the data undergo Markov regime switching. All tests, including those robust to a single break in trend growth rate, have low power against a process with a Markov-switching trend. Under the null hypothesis, we find previously documented size distortions in Dickey-Fuller type tests caused by a single break in trend growth rate or variance do not generalize to most parameterizations of Markov switching in trend or variance. However, Markov switching in variance can lead to overrejection in tests allowing for a single break in the level of trend.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-013.

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Date of creation: 2001
Publication status: Published in Journal of Business and Economic Statistics, October 2001, 19(4), pp. 404-15
Handle: RePEc:fip:fedlwp:2001-013
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