GLS-based unit root tests with multiple structural breaks both under the null and the alternative hypotheses

Josep Lluís Carrion-i-Silvestre (), Dukpa Kim () and Pierre Perron ()
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Dukpa Kim: Department of Economics, University of Virginia

No wp2008-019, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: Perron (1989) introduced unit root tests valid when a break at a known date in the trend function of a time series is present, which are invariant to the magnitude of the shift in level and/or slope and to allow them under both the null and alternative hypotheses. The subsequent literature devised procedures valid in the case of an unknown break date. However, in doing so most, in particular the commonly used test of Zivot and Andrews (1992), assumed that if a break occurs it does so only under the alternative hypothesis of stationarity. This is undesirable for several reasons. Kim and Perron (2007) developed a methodology that allows a break at an unknown time under both the null and alternative hypotheses. When a break is present, the limit distribution of the test is the same as in the case of a known break date allowing increased power while maintaining the correct size. We extend their work in several directions: 1) we allow for an arbitrary number of changes in both the level and slope of the trend function; 2) we adopt the quasi-GLS detrending method advocated by Elliott et al. (1996) which permits tests that have local asymptotic power functions close to the local asymptotic Gaussian power envelope; 3) we consider a variety of tests, in particular the class of M-tests introduced in Stock (1999) and analyzed in Ng and Perron (2001).

Keywords: multiple structural breaks; unit root; GLS detrending (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2007-09
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