Impact of Model Specification Decisions on Unit Root Tests

Atiq Rehman and Asad Zaman

MPRA Paper from University Library of Munich, Germany

Abstract: Performance of unit tests depends on several specification decisions prior to their application e.g., whether or not to include a deterministic trend. Since there is no standard procedure for making such decisions, therefore the practitioners routinely make several arbitrary specification decisions. In Monte Carlo studies, the design of DGP supports these decisions, but for real data, such specification decisions are often unjustifiable and sometimes incompatible with data. We argue that the problems posed by choice of initial specification are quite complex and the existing voluminous literature on this issue treats only certain superficial aspects of this choice. We also show how these initial specifications affect the performance of unit root tests and argue that Monte Carlo studies should include these preliminary decisions to arrive at a better yardstick for evaluating such tests.

Keywords: model specification; trend stationary; difference stationary (search for similar items in EconPapers)
JEL-codes: C01 C15 C22 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Impact of Model Specification Decisions on Unit Root Tests (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:19963

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