Useful modifications to some unit root tests with dependent errors and their local asymptotic properties. (English) Zbl 0872.62085

Perron, Pierre; Ng, Serena

Rev. Econ. Stud. 63, No. 3, 435-463 (1996).

Summary: Many unit root tests have distorted sizes when the root of the error process is close to the unit circle. This paper analyses the properties of the Phillips-Perron tests [P. C. B. Phillips and P. Perron, Biometrika 75, No. 2, 335-346 (1988; Zbl 0644.62094)] and some of their variants in the problematic parameter space. We use local asymptotic analyses to explain why the Phillips-Perron tests suffer from severe size distortions regardless of the choice of the spectral density estimator but that the modified statistics show dramatic improvements in size when used in conjunction with a particular formulation of an autoregressive spectral density estimator. We explain why kernel based spectral density estimators aggravate the size problem in the Phillips-Perron tests and yield no size improvement to the modified statistics. The local asymptotic power of the modified statistics are also evaluated. These modified statistics are recommended as being useful in empirical work since they are free of the size problems which have plagued many unit root tests, and they retain respectable power.

MSC:

62M10	Time series, auto-correlation, regression, etc. in statistics (GARCH)
62M15	Inference from stochastic processes and spectral analysis
62P20	Applications of statistics to economics

Keywords:

unit root tests; Phillips-Perron tests; autoregressive spectral density estimator; local asymptotic power

Citations:

Zbl 0644.62094