UNIT ROOT TESTING IN PRACTICE: DEALING WITH UNCERTAINTY OVER THE TREND AND INITIAL CONDITION

David . Harvey, Stephen J. Leybourne and Robert Taylor

Econometric Theory, 2009, vol. 25, issue 03, pages 587-636

Abstract: In this paper we focus on two major issues that surround testing for a unit root in practice, namely, (i) uncertainty as to whether or not a linear deterministic trend is present in the data and (ii) uncertainty as to whether the initial condition of the process is (asymptotically) negligible or not. In each case simple testing procedures are proposed with the aim of maintaining good power properties across such uncertainties. For the first issue, if the initial condition is negligible, quasi-differenced (QD) detrended (demeaned) Dickey Fuller-type tests rejects. This procedure is also shown to perform well in practice, simultaneously exploiting the superior power of the QD (OLS) detrended/demeaned test for small (large) initial conditions.

Date: 2009
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