Behaviour of Dickey–Fuller Unit‐Root Tests Under Trend Misspecification

Tae-Hwan Kim (), Stephen Leybourne () and Paul Newbold

Journal of Time Series Analysis, 2004, vol. 25, issue 5, 755-764

Abstract: Abstract. We analyse the case where a unit‐root test is based on a Dickey–Fuller regression the only deterministic term of which is a fixed intercept. Suppose, however, as could well be the case, that the actual data‐generating process includes a broken linear trend. It is shown theoretically, and verified empirically, that under the I(1) null and I(0) alternative hypotheses the Dickey–Fuller test can display a wide range of different characteristics depending on the nature and location of the break.

Date: 2004
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https://doi.org/10.1111/j.1467-9892.2004.02000.x

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