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Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for Applied Work

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  • Mehmet Caner

    () (Bilkent University)

  • Lutz Kilian

    () (University of Michigan)

Abstract

It is common in applied econometrics to test a highly persistent process under the null hypothesis against an alternative of a unit root process. We show that the conventional asymptotic critical values for the stationarity tests of Kwiatkowski et al. and Leybourne and McCabe may have substantial size distortions if the model under the null hypothesis is highly persistent. Such size distortions have not been recognized in the literature. The practical importance of these distortions is illustrated when testing for long-run purchasing power parity under current float. Size distortions of tests of the null of a unit root may be overcome by the use of finite sample or bootstrap critical values. We show such corrections are not possible when testing the null of stationarity, and we conclude that tests of this null cannot be recommended for applied work unless the sample size is very large.

Suggested Citation

  • Mehmet Caner & Lutz Kilian, 1999. "Size Distortions of Tests of the Null Hypothesis of Stationarity: Evidence and Implications for Applied Work," Computing in Economics and Finance 1999 511, Society for Computational Economics.
  • Handle: RePEc:sce:scecf9:511
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    Cited by:

    1. Ata Assaf, 2006. "Nonlinear Trend Stationarity in Real Exchange Rates: Evidence from Nonlinear ADF tests," Annals of Economics and Finance, Society for AEF, vol. 7(2), pages 283-294, November.
    2. Diebold, Francis X & Kilian, Lutz, 2000. "Unit-Root Tests Are Useful for Selecting Forecasting Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(3), pages 265-273, July.
    3. Culver, Sarah E. & Papell, David H., 1999. "Long-run purchasing power parity with short-run data: evidence with a null hypothesis of stationarity," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 751-768, October.
    4. Ahmad Zubaidi Baharumshah & Raj Aggarwal & Chan Tze Haw, 2007. "East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests," Global Economic Review, Taylor & Francis Journals, vol. 36(2), pages 103-119.

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