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BOOTSTRAP-ASSISTED UNIT ROOT TESTING WITH PIECEWISE LOCALLY STATIONARY ERRORS

Yeonwoo Rho and Xiaofeng Shao ()

Econometric Theory, 2019, vol. 35, issue 1, 142-166

Abstract: In unit root testing, a piecewise locally stationary process is adopted to accommodate nonstationary errors that can have both smooth and abrupt changes in second- or higher-order properties. Under this framework, the limiting null distributions of the conventional unit root test statistics are derived and shown to contain a number of unknown parameters. To circumvent the difficulty of direct consistent estimation, we propose to use the dependent wild bootstrap to approximate the nonpivotal limiting null distributions and provide a rigorous theoretical justification for bootstrap consistency. The proposed method is compared through finite sample simulations with the recolored wild bootstrap procedure, which was developed for errors that follow a heteroscedastic linear process. Furthermore, a combination of autoregressive sieve recoloring with the dependent wild bootstrap is shown to perform well. The validity of the dependent wild bootstrap in a nonstationary setting is demonstrated for the first time, showing the possibility of extensions to other inference problems associated with locally stationary processes.

Date: 2019
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Working Paper: Bootstrap-Assisted Unit Root Testing With Piecewise Locally Stationary Errors (2018) Downloads
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