On maintaining the power of the Kapetanios--Snell--Shin (KSS) test under uncertain initial conditions

Jen-Je Su and Duc-Tho Nguyen

Applied Economics Letters, 2012, vol. 19, issue 9, pages 891-896

Abstract: This article investigates the impact of initial condition (specifically, the deviation of the initial observation from the underlying deterministic component) on the power properties of the nonlinear Kapetanios-- Snell--Shin (KSS) unit root test. While the Generalized Least Squares (GLS)-detrended KSS test has significant power advantage over the Ordinary Least Squares (OLS)-detrended KSS test if the initial deviation is small, the opposite occurs if the initial deviation is large. These results are similar to those found previously for the Dickey--Fuller (DF) test. To maintain good power properties across different initial conditions, a Union of Rejections (UR) strategy is adopted; the strategy is demonstrated to be useful.

Date: 2012
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