POWER FUNCTIONS AND ENVELOPES FOR UNIT ROOT TESTS

Ted Juhl and Zhijie Xiao

Econometric Theory, 2003, vol. 19, issue 02, pages 240-253

Abstract: This paper studies power functions and envelopes for covariate augmented unit root tests. The power functions are calculated by integrating the characteristic function, allowing accurate evaluation of the power envelope and the power functions. Using the power functions, we study the selection among point optimal invariant unit root tests. An optimal point optimal test is proposed based on minimizing the integrated power difference. We find that when there are covariate effects, optimal tests use a local alternative where the power envelope has an approximate value of 0.75.We thank Pentti Saikkonen and two referees for helpful comments.

Date: 2003

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Persistent link: http://EconPapers.repec.org/RePEc:cup:etheor:v:19:y:2003:i:02:p:240-253_19

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