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Using panel data to increase the power of modified unit root tests in the presence of structural breaks

Jönsson, Kristian LU (2005) In Applied Mathematics and Computation 171(2). p.832-842
Abstract
When testing for unit roots using the Dickey-Fuller test, the presence of structural breaks can cause serious size distortions to the test. Previous research has suggested two modified tests, the weighted symmetric and the recursively mean-adjusted test, that has robust size properties even in the presence of a structural break. However, recent findings have shown that the power of the two modified unit root tests is severely decreased in the presence of structural breaks. In this paper, we suggest that time series for several cross-sections can be simultaneously considered to increase the power of the modified unit root tests. We suggest two panel data tests that are easy to calculate and show that these tests have an asymptotically... (More)
When testing for unit roots using the Dickey-Fuller test, the presence of structural breaks can cause serious size distortions to the test. Previous research has suggested two modified tests, the weighted symmetric and the recursively mean-adjusted test, that has robust size properties even in the presence of a structural break. However, recent findings have shown that the power of the two modified unit root tests is severely decreased in the presence of structural breaks. In this paper, we suggest that time series for several cross-sections can be simultaneously considered to increase the power of the modified unit root tests. We suggest two panel data tests that are easy to calculate and show that these tests have an asymptotically normal distribution. Using Monte Carlo simulations, we also show that the use of the suggested panel data tests contribute to very large increases in the power of the modified tests, although structural breaks are present under the null hypothesis. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
response surface, structural change, unit root test, panel data, Monte, Carlo simulation
in
Applied Mathematics and Computation
volume
171
issue
2
pages
832 - 842
publisher
Elsevier
external identifiers
  • wos:000235539900014
  • scopus:31144432266
ISSN
0096-3003
DOI
10.1016/j.amc.2005.01.090
language
English
LU publication?
yes
id
bbd1dc3f-26cc-4390-acee-64d95ce5a21a (old id 209283)
date added to LUP
2007-09-28 10:59:40
date last changed
2017-01-01 05:06:15
@article{bbd1dc3f-26cc-4390-acee-64d95ce5a21a,
  abstract     = {When testing for unit roots using the Dickey-Fuller test, the presence of structural breaks can cause serious size distortions to the test. Previous research has suggested two modified tests, the weighted symmetric and the recursively mean-adjusted test, that has robust size properties even in the presence of a structural break. However, recent findings have shown that the power of the two modified unit root tests is severely decreased in the presence of structural breaks. In this paper, we suggest that time series for several cross-sections can be simultaneously considered to increase the power of the modified unit root tests. We suggest two panel data tests that are easy to calculate and show that these tests have an asymptotically normal distribution. Using Monte Carlo simulations, we also show that the use of the suggested panel data tests contribute to very large increases in the power of the modified tests, although structural breaks are present under the null hypothesis.},
  author       = {Jönsson, Kristian},
  issn         = {0096-3003},
  keyword      = {response surface,structural change,unit root test,panel data,Monte,Carlo simulation},
  language     = {eng},
  number       = {2},
  pages        = {832--842},
  publisher    = {Elsevier},
  series       = {Applied Mathematics and Computation},
  title        = {Using panel data to increase the power of modified unit root tests in the presence of structural breaks},
  url          = {http://dx.doi.org/10.1016/j.amc.2005.01.090},
  volume       = {171},
  year         = {2005},
}