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Quantile nonlinear unit root test with covariates and an application to the PPP hypothesis

Yang Yang and Zhao Zhao

Economic Modelling, 2020, vol. 93, issue C, 728-736

Abstract: In this article, we employ the methods initiated by Hansen (1995) to develop new quantile nonlinear unit root tests with covariates. The limiting distributions of our proposed tests are derived, which are dependent on nuisance parameter reflecting the correlation between the equation error and the covariates. To deal with this inferential difficulty, two alternative procedures based on either consistent estimate of the nuisance parameter or bootstrap implementation of the test are proposed. Monte Carlo simulations show that the proposed tests perform very well in finite samples and large power gains can be achieved by including correlated covariates in the testing equation. The proposed tests are applied to the PPP hypothesis. The empirical results indicate that the real exchange rates are not constant unit root processes.

Keywords: Unit root; Quantile; Covariates; PPP (search for similar items in EconPapers)
JEL-codes: C12 F31 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:93:y:2020:i:c:p:728-736

DOI: 10.1016/j.econmod.2020.01.021

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