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Lag truncation and the local asymptotic distribution of the ADF test for a unit root

Aylar, Emre LU ; Smeekes, Stephan and Westerlund, Joakim LU (2017) In Statistical Papers
Abstract

The issue of lag selection in ADF unit root testing is important, even asymptotically, for if the number of lags is not allowed to increase at a certain rate the test might not be correctly sized. However, size control is not the only concern. Indeed, simulations have repeatedly shown how increasing lag lengths tend to be associated with reductions in power, thus adding to the well-known low power problem when the alternative is local to the unit root. But while the simulation evidence is plentiful, there is as of yet almost no asymptotic results that can be used to ascertain whether lag length has any effect on the local asymptotic power of the ADF test. The purpose of the present paper is to fill this gap in the literature.

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author
organization
publishing date
type
Contribution to journal
publication status
epub
subject
keywords
ADF test, Lag selection, Local asymptotic power, Unit root testing
in
Statistical Papers
pages
10 pages
publisher
Springer
external identifiers
  • scopus:85018695508
ISSN
0932-5026
DOI
10.1007/s00362-017-0911-y
language
English
LU publication?
yes
id
ae5b8ab1-728d-49da-92ac-d33ef8c5ab86
date added to LUP
2017-05-24 07:42:10
date last changed
2018-01-07 12:05:05
@article{ae5b8ab1-728d-49da-92ac-d33ef8c5ab86,
  abstract     = {<p>The issue of lag selection in ADF unit root testing is important, even asymptotically, for if the number of lags is not allowed to increase at a certain rate the test might not be correctly sized. However, size control is not the only concern. Indeed, simulations have repeatedly shown how increasing lag lengths tend to be associated with reductions in power, thus adding to the well-known low power problem when the alternative is local to the unit root. But while the simulation evidence is plentiful, there is as of yet almost no asymptotic results that can be used to ascertain whether lag length has any effect on the local asymptotic power of the ADF test. The purpose of the present paper is to fill this gap in the literature.</p>},
  author       = {Aylar, Emre and Smeekes, Stephan and Westerlund, Joakim},
  issn         = {0932-5026},
  keyword      = {ADF test,Lag selection,Local asymptotic power,Unit root testing},
  language     = {eng},
  month        = {05},
  pages        = {10},
  publisher    = {Springer},
  series       = {Statistical Papers},
  title        = {Lag truncation and the local asymptotic distribution of the ADF test for a unit root},
  url          = {http://dx.doi.org/10.1007/s00362-017-0911-y},
  year         = {2017},
}