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Testing the Order of Fractional Integration of a Time Series in the Possible Presence of a Trend Break at an Unknown Point

Iacone, Fabrizio and Leybourne, Stephen J and Taylor, AM Robert (2017) Testing the Order of Fractional Integration of a Time Series in the Possible Presence of a Trend Break at an Unknown Point. Working Paper. Essex Finance Centre Working Papers, Colchester. (Unpublished)

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Abstract

We develop a test, based on the Lagrange multiplier [LM] testing principle, for the value of the long memory parameter of a univariate time series that is composed of a fractionally integrated shock around a potentially broken deterministic trend. Our proposed test is constructed from data which are de-trended allowing for a trend break whose (unknown) location is estimated by a standard residual sum of squares estimator. We demonstrate that the resulting LM-type statistic has a standard limiting null chi-squared distribution with one degree of freedom, and attains the same asymptotic local power function as an infeasible LM test based on the true shocks. Our proposed test therefore attains the same asymptotic local optimality properties as an oracle LM test in both the trend break and no trend break environments. Moreover, and unlike conventional unit root and stationarity tests, this asymptotic local power function does not alter between the break and no break cases and so there is no loss in asymptotic local power from allowing for a trend break at an unknown point in the sample, even in the case where no break is present. We also report the results from a Monte Carlo study into the finite-sample behaviour of our proposed test.

Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Fractional integration; trend break; Lagrange multiplier test; asymptotically locally most powerful test
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Jim Jamieson
Date Deposited: 11 May 2017 11:09
Last Modified: 03 Jan 2020 10:15
URI: http://repository.essex.ac.uk/id/eprint/19654

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