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GLS Detrending-Based Unit Root Tests in Nonlinear STAR and SETAR Frameworks

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Abstract

This paper consider the GLS detrending procedure advanced by Elliott et al. (1996) for unit root tests against alternative hypotheses where the time series data under investigation follow either globally stationary SETAR or STAR processes with deterministic components being present. It is found that the proposed testing procedures have considerable power gains against both the standard Dickey-Fuller unit root tests and existing nonlinear unit root tests recently proposed by Kapetanios and Shin (2002) and Kapetanios et al. (2003). The empirical application to DM and Yen bilateral real exchange rates against a number of other currencies also confirms that nonlinear unit root tests based on GLS detrending will be more powerful than linear ones. Interestingly, we find that the DM dataset seems to produce more rejections of the null using the GLS detrending-based SETAR tests than using the GLS detrending-based STAR tests, whereas the number of rejections of both tests are similar for the Yen dataset. The different results may arise from the respective liquidity of the DM and Yen Forex markets.

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  • George Kapetanios & Yongcheol Shin, 2003. "GLS Detrending-Based Unit Root Tests in Nonlinear STAR and SETAR Frameworks," Edinburgh School of Economics Discussion Paper Series 108, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:108
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    More about this item

    Keywords

    unit root tests; nonlinear STAR and SETAR models; GLS detrending; real exchange rates;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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