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Speci cation Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior

Author

Listed:
  • Peter C. B. Phillips

    (Yale University)

  • Shu-Ping Shi

    (The Australian National University)

  • Jun Yu

    (Sim Kee Boon Institute for Financial Economics, Singapore Management University)

Abstract

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.

Suggested Citation

  • Peter C. B. Phillips & Shu-Ping Shi & Jun Yu, 2011. "Speci cation Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior," Working Papers CoFie-09-2011, Singapore Management University, Sim Kee Boon Institute for Financial Economics.
    • Handle: RePEc:skb:wpaper:cofie-09-2011
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    File URL: http://skbi.smu.edu.sg/downloads/skbi/CoFiE/Working%20Papers/Hypothesis_NOV2011J.pdf
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    Cited by:

    1. Peter C.B. Phillips & Shu-Ping Shi, 2014. "Financial Bubble Implosion," Cowles Foundation Discussion Papers 1967, Cowles Foundation for Research in Economics, Yale University.
    2. Zhao, Yanping & Chang, Hsu-Ling & Su, Chi-Wei & Nian, Rui, 2015. "Gold bubbles: When are they most likely to occur?," Japan and the World Economy, Elsevier, vol. 34, pages 17-23.
    3. Janusz Sobieraj & Dominik Metelski, 2021. "Testing Housing Markets for Episodes of Exuberance: Evidence from Different Polish Cities," JRFM, MDPI, vol. 14(9), pages 1-29, September.
    4. Prehn Sören & Glauben Thomas & Pies Ingo & Will Matthias & Loy Jens-Peter, 2013. "Betreiben Indexfonds Agrarspekulation? Erläuterungen zum Geschäftsmodell und zum weiteren Forschungsbedarf / Do Index Funds Speculate on Agricultural Futures Markets? Explanatory Notes on the Business," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 64(1), pages 421-442, January.
    5. Prehn, Sören & Glauben, Thomas & Pies, Ingo & Will, Matthias Georg & Loy, Jens-Peter, 2013. "Betreiben Indexfonds Agrarspekulation? Erläuterungen zum Geschäftsmodell und zum weiteren Forschungsbedarf [Do index funds speculate on agricultural futures markets? Explanatory notes on the busine," IAMO Discussion Papers 138, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    6. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2014. "Bubbles in food commodity markets: Four decades of evidence," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 129-155.
    7. Xi-Xi Zhang & Lu Liu & Chi-Wei Su & Ran Tao & Oana-Ramona Lobonţ & Nicoleta-Claudia Moldovan, 2019. "Bubbles in Agricultural Commodity Markets of China," Complexity, Hindawi, vol. 2019, pages 1-7, December.
    8. Aytül Ganioğlu, 2020. "How Consumers' Inflation Expectations Respond to Explosive Periods of Food and Energy Prices: Evidence for European Union Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2020(3), pages 351-377.
    9. Nicole Storp & Tobias Kordsmeyer, 2019. "Zeitreihenanalyse zu den Target-Forderungen der Deutschen Bundesbank und mögliche Zusammenhänge mit der expansiven Geldpolitik der EZB," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 72(06), pages 26-28, March.
    10. Siab Mamipour & Mahshid Sepahi, 2015. "Analysis of the Behavior of Amateur and Professional Investors’ Impact on the Formation of Bubbles in Tehran Stock Market," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 19(3), pages 341-358, Autumn.
    11. Aytül Ganioğlu, . "How Consumers' Inflation Expectations Respond to Explosive Periods of Food and Energy Prices: Evidence for European Union Countries," Prague Economic Papers, University of Economics, Prague, vol. 0.
    12. Aytül Ganioğlu, . "How Consumers’ Inflation Expectations Respond to Explosive Periods of Food and Energy Prices: Evidence for European Union Countries," Prague Economic Papers, University of Economics, Prague, vol. 0, pages 1-24.

    More about this item

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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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