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Title:A new approach to unit root testing PDF Logo
Authors:Herwartz, Helmut
Siedenburg, Florian
Issue Date:2009
Series/Report no.:Economics working paper / Christian-Albrechts-Universität Kiel, Department of Economics 2009,06
Abstract:A novel simulation based approach to unit root testing is proposed in this paper. The test is constructed from the distinct orders in probability of the OLS parameter estimates obtained from a spurious and an unbalanced regression, respectively. While the parameter estimate from a regression of two integrated and uncorrelated time series is of order Op(1), the estimate is of order Op(T-1) if the dependent variable is stationary. The test statistic is constructed as an inter quantile range from the empirical distribution obtained from regressing the standardized data sufficiently often on controlled random walks. GLS detrending (Elliott et al, 1996) and spectral density variance estimators (Perron and Ng, 1998) are applied to account for deterministic terms and residual autocorrelation in the data. A Monte Carlo study confirms that the proposed test has favorable empirical size properties and is powerful in local-to-unity neighborhoods. Testing for PPP for a sample of G6 economies, the proposed test yields results in favor of PPP for half of the sample economies while benchmark tests obtain at most one rejection of the random walk null hypothesis.
Subjects:Unit root tests
simulation based test
simulation study
GLS detrending
JEL:C22
C12
Document Type:Working Paper
Appears in Collections:Economics Working Papers, Department of Economics, CAU Kiel

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