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Behaviour of Dickey-Fuller Unit Root Tests Under Trend Misspecification

  • Steve Leybourne

    (Nottingham)

  • Tae-Hwan Kim

    (Nottingham)

  • Paul Newbold

    (Nottingham)

We analyse the case where a unit root test is based on a Dickey-Fuller regression whose only deterministic term is a fixed intercept. Suppose, however, as could well be the case, that the actual data generating process includes a broken linear trend. It is shown theoretically, and verified empirically, that under the I(1) null and I(0) alternative hypotheses the Dickey-Fuller test can display a wide range of different characteristics depending on the nature and location of the break.

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Paper provided by EconWPA in its series Econometrics with number 0311008.

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Date of creation: 17 Nov 2003
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Handle: RePEc:wpa:wuwpem:0311008
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  1. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche 9422, Universite de Montreal, Departement de sciences economiques.
  2. Pantula, Sastry G & Gonzalez-Farias, Graciela & Fuller, Wayne A, 1994. "A Comparison of Unit-Root Test Criteria," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 449-59, October.
  3. Leybourne, Stephen J. & Newbold, Paul, 2000. "BEHAVIOR OF DICKEY FULLER t-TESTS WHEN THERE IS A BREAK UNDER THE ALTERNATIVE HYPOTHESIS," Econometric Theory, Cambridge University Press, vol. 16(05), pages 779-789, October.
  4. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  5. Ayat, Leila & Burridge, Peter, 2000. "Unit root tests in the presence of uncertainty about the non-stochastic trend," Journal of Econometrics, Elsevier, vol. 95(1), pages 71-96, March.
  6. West, Kenneth D., 1987. "A note on the power of least squares tests for a unit root," Economics Letters, Elsevier, vol. 24(3), pages 249-252.
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