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Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior

  • Peter C. B. Phillips

    ()

    (Yale University, University of Auckland, University of Southampton & Singapore Management University)

  • Shu-Ping Shi

    ()

    (Research School of Economics, The Australian National University)

  • Jun Yu

    ()

    (School of Economics, Singapore Management Unversity)

Right-tailed unit root tests have proved promising for detecting exuberance in economic and financial activities. Like left-tailed tests, the limit theory and test performance are sensitive to the null hypothesis and the model specification used in parameter estimation. This paper aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focussing on the sup ADF test of Phillips, Wu and Yu (2011), which implements a right- tailed ADF test repeatedly on a sequence of forward sample recursions. We analyze and compare the limit theory of the sup ADF test under different hypotheses and model specifications. The size and power properties of the test under various scenarios are examined in simulations and some recommendations for empirical practice are given. Empirical applications to the Nasdaq and to Australian and New Zealand housing data illustrate these specification issues and reveal their practical importance in testing.

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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 15-2011.

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Length: 32 pages
Date of creation: Nov 2011
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:15-2011
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  1. Peter C. B. Phillips & Jun Yu, 2009. "Dating the Timeline of Financial Bubbles During the Subprime Crisis," Finance Working Papers 23051, East Asian Bureau of Economic Research.
  2. Peter C.B. Phillips & Shu-Ping Shi & Jun Yu, 2011. "Testing for Multiple Bubbles," Working Papers 09-2011, Singapore Management University, School of Economics.
  3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  4. Peter C.B. Phillips & Tassos Magdalinos, 2004. "Limit Theory for Moderate Deviations from a Unit Root," Cowles Foundation Discussion Papers 1471, Cowles Foundation for Research in Economics, Yale University.
  5. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  6. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
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