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Unit root testing with slowly varying trends

Sven Otto

Journal of Time Series Analysis, 2021, vol. 42, issue 1, 85-106

Abstract: A unit root test is proposed for time series with a general nonlinear deterministic trend component. It is shown that asymptotically the pooled OLS estimator of overlapping blocks filters out any trend component that satisfies some Lipschitz condition. Under both fixed‐b and small‐b block asymptotics, the limiting distribution of the t‐statistic for the unit root hypothesis is derived. Nuisance parameter corrections provide heteroskedasticity‐robust tests, and serial correlation is accounted for by pre‐whitening. A Monte Carlo study that considers slowly varying trends yields both good size and improved power results for the proposed tests when compared to conventional unit root tests.

Date: 2021
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Handle: RePEc:bla:jtsera:v:42:y:2021:i:1:p:85-106