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Testing for unit roots in the possible presence of multiple trend breaks using minimum Dickey–Fuller statistics

Harvey, David I and Leybourne, Stephen J and Taylor, AM Robert (2013) 'Testing for unit roots in the possible presence of multiple trend breaks using minimum Dickey–Fuller statistics.' Journal of Econometrics, 177 (2). pp. 265-284. ISSN 0304-4076

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Trend breaks appear to be prevalent in macroeconomic time series, and unit root tests therefore need to make allowance for these if they are to avoid the serious effects that unmodelled trend breaks have on power. Carrion-i-Silvestre et al. (2009) propose a pre-test-based approach which delivers near asymptotically efficient unit root inference both when breaks do not occur and where multiple breaks occur, provided the break magnitudes are fixed. Unfortunately, however, the fixed magnitude trend break asymptotic theory does not predict well the finite sample power functions of these tests, and power can be very low for the magnitudes of trend breaks typically observed in practice. In response to this problem we propose a unit root test that allows for multiple breaks in trend, obtained by taking the infimum of the sequence (across all candidate break points in a trimmed range) of local GLS detrended augmented Dickey-Fuller-type statistics. We show that this procedure has power that is robust to the magnitude of any trend breaks, thereby retaining good finite sample power in the presence of plausibly-sized breaks. We also demonstrate that, unlike the OLS detrended infimum tests of Zivot and Andrews (1992), these tests display no tendency to spuriously reject in the limit when fixed magnitude trend breaks occur under the unit root null. © 2013 Elsevier B.V. All rights reserved.

Item Type: Article
Uncontrolled Keywords: Unit root test; Multiple breaks in trend; Minimum Dickey-Fuller test; Local GLS detrending
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 17 Nov 2014 13:00
Last Modified: 15 Jan 2022 00:47

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