A Fixed-b Perspective on the Phillips-Perron Unit Root Tests
We extend fixed-b asymptotic theory to the nonparametric Phillips-Perron (PP) unit root tests. We show that the fixed-b limits depend on nuisance parameters in a complicated way. These non-pivotal limits provide an alternative theoretical explanation for the well known finite sample problems of PP tests. We also show that the fixed-b limits depend on whether deterministic trends are removed using one-step or two-step approaches, contrasting the asymptotic equivalence of the one- and two-step approaches under a consistency approximation for the long run variance estimator. Based on these results we introduce modified PP tests that allow for fixed-b inference. The theoretical analysis is cast in the framework of near-integrated processes which allows to study the asymptotic behavior both under the unit root null hypothesis as well as for local alternatives. The performance of the original and modified tests is compared by means of local asymptotic power and a small simulation study.
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| Length: | 19 pages |
| Date of creation: | Jul 2011 |
| Handle: | RePEc:ihs:ihsesp:272 |
| Contact details of provider: | Postal: Josefstädterstr. 39, A-1080 Vienna, Austria Phone: ++43 - (0)1 - 599 91 - 0 Fax: ++43 - (0)1 - 599 91 - 555 Web page: http://www.ihs.ac.at More information through EDIRC
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| Order Information: | Postal: Institute for Advanced Studies - Library, Josefstädterstr. 39, A-1080 Vienna, Austria |
References listed on IDEAS
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