unit root testing in the presence of innovation variance breaks a simple solution with increased power单位根检验的创新方差优惠与权力增加一个简单的解决方案.pdfVIP

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unit root testing in the presence of innovation variance breaks a simple solution with increased power单位根检验的创新方差优惠与权力增加一个简单的解决方案.pdf

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unit root testing in the presence of innovation variance breaks a simple solution with increased power单位根检验的创新方差优惠与权力增加一个简单的解决方案

UNIT ROOT TESTING IN THE PRESENCE OF INNOVATION VARIANCE BREAKS: A SIMPLE SOLUTION WITH INCREASED POWER STEVEN COOK Received 30 July 2001 and in revised form 5 March 2002 The Dickey-Fuller unit root test is known to suﬀer severe oversizing in the presence of innovation variance breaks. In this paper, forward and reverse Dickey-Fuller regressions are proposed as a means of correcting this size distortion. The results of Monte Carlo experimentation show such an approach to result in both satisfactory size properties and in- creased power relative to previously suggested solutions. 1. Introduction The Dickey-Fuller (DF) test [4] is routinely employed in applied econo- metric analysis to examine the order of integration of economic time se- ries. Recently, Kim et al. [9] have considered the properties of the DF test when applied to a unit root process, which experiences a break in inno- vation variance. This analysis is a welcome development, as in contrast to the huge literature on the behaviour of unit root tests in the presence of structural breaks in the level or trend of a time series (see, inter alia, Bai et al. [1]; Bai and Perron [2]; Banerjee et al. [3]; Perron [12, 13]), the impact of structural changes in variance has rarely been addressed, es- pecially for integrated processes. (Wichern, Miller, and Hsu [14], Hsu [7], and Inclan [8] are cited by Kim et al. [9] as examples of the few in- stances where variance breaks have been considered in general circum- stances. The only case cited where the impact of variance breaks has been considered in the context of integrated processes is Hamori and Tokihisa [6].) The evidence presented by Kim et al. [9] shows that when the break in variance takes the form of a large decrease early in the sample period, the DF can suﬀer severe size distortion. With a DF testing equation as c Copyright 2002 Hindawi Publishing Corporation Journal of Applied Mathematics 2:5 (2002) 23