Fixed and Recursive Right-Tailed Dickey–Fuller Tests in the Presence of a Break under the Null

Robert Sollis

Journal of Time Series Econometrics, 2016, vol. 8, issue 1, 1-19

Abstract: Right-tailed Dickey–Fuller-type unit root tests against the explosive alternative have become popular in economics and finance for detecting asset price bubbles. This paper studies the size properties of fixed sample and recursive right-tailed Dickey–Fuller tests if the relevant series contains a unit root, but a structural break in the drift parameter occurs. It is shown that positive size distortion and therefore spurious rejections of the unit root null hypothesis in favour of the explosive alternative can be a problem for both types of test. Some possible solutions to this problem are briefly discussed.

Keywords: explosive autoregression; structural break; unit root (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/jtse-2013-0004

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