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LUND UNIVERSITY LIBRARIES

On the use of integer and fractional flexible Fourier form Dickey-Fuller unit root tests

Nordström, Marcus LU (2018) NEKP01 20172
Department of Economics
Abstract
In this paper we propose the use of a new set of conservative critical values for the flexible Fourier form Dickey-Fuller unit root test when the Fourier frequency is estimated. We consider both the integer frequency and the fractional frequency version of the test and investigate their size and power properties. We find that the integer frequency test sometimes has zero power when the deterministic component of the data generating process is characterized by a fractional frequency. Furthermore, when the originally proposed critical values are applied both versions of the test are oversized when the frequency is estimated. However, whereas the integer frequency test is only moderately oversized the fractional frequency test is... (More)
In this paper we propose the use of a new set of conservative critical values for the flexible Fourier form Dickey-Fuller unit root test when the Fourier frequency is estimated. We consider both the integer frequency and the fractional frequency version of the test and investigate their size and power properties. We find that the integer frequency test sometimes has zero power when the deterministic component of the data generating process is characterized by a fractional frequency. Furthermore, when the originally proposed critical values are applied both versions of the test are oversized when the frequency is estimated. However, whereas the integer frequency test is only moderately oversized the fractional frequency test is significantly oversized in many cases. To remedy the size problems we simulate new critical values for the case where the frequency is estimated. The critical values are conservative, and hence yields an undersized test in some cases. Nevertheless, the resulting fractional frequency test with the new conservative critical values applied to it has good power properties. (Less)
Please use this url to cite or link to this publication:
author
Nordström, Marcus LU
supervisor
organization
course
NEKP01 20172
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Fractional frequency flexible Fourier form, Unit root test, Structural break, Smooth break, Nonlinear trend
language
English
id
8935950
date added to LUP
2018-02-19 10:26:34
date last changed
2018-02-19 10:26:34
@misc{8935950,
  abstract     = {{In this paper we propose the use of a new set of conservative critical values for the flexible Fourier form Dickey-Fuller unit root test when the Fourier frequency is estimated. We consider both the integer frequency and the fractional frequency version of the test and investigate their size and power properties. We find that the integer frequency test sometimes has zero power when the deterministic component of the data generating process is characterized by a fractional frequency. Furthermore, when the originally proposed critical values are applied both versions of the test are oversized when the frequency is estimated. However, whereas the integer frequency test is only moderately oversized the fractional frequency test is significantly oversized in many cases. To remedy the size problems we simulate new critical values for the case where the frequency is estimated. The critical values are conservative, and hence yields an undersized test in some cases. Nevertheless, the resulting fractional frequency test with the new conservative critical values applied to it has good power properties.}},
  author       = {{Nordström, Marcus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{On the use of integer and fractional flexible Fourier form Dickey-Fuller unit root tests}},
  year         = {{2018}},
}