Selecting the Lag Length for the M GLS Unit Root Tests with Structural Change: A Warning Note for Practitioners Based on Simulations

Ricardo Quineche and Gabriel Rodríguez

Econometrics, 2017, vol. 5, issue 2, 1-10

Abstract: This is a simulation-based warning note for practitioners who use the M G L S unit root tests in the context of structural change using different selection lag length criteria. With T = 100 , we find severe oversize problems when using some criteria, while other criteria produce an undersizing behavior. In view of this dilemma, we do not recommend using these tests. While such behavior tends to disappear when T = 250 , it is important to note that most empirical applications use smaller sample sizes such as T = 100 or T = 150 . The A D F G L S test does not present an oversizing or undersizing problem. The only disadvantage of the A D F G L S test arises in the presence of M A ( 1 ) negative correlation, in which case the M G L S tests are preferable, but in all other cases they are very undersized. When there is a break in the series, selecting the breakpoint using the Supremum method greatly improves the results relative to the Infimum method.

Keywords: unit root tests; structural change; truncation lag; GLS detrending; information criteria; sequential general to specific t-sig method (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2017
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