Understanding the functional central limit theorems with some applications to unit root testing with structural change

Juan Aquino and Gabriel Rodríguez

Revista Economía, 2013, vol. 36, issue 71, 107-149

Abstract: The application of different unit root statistics is by now a standard practice in empirical work. Even when it is a practical issue, these statistics have complex nonstandard distributions depending on functionals of certain stochastic processes, and their derivations represent a barrier even for many theoretical econometricians. These derivations are based on rigorous and fundamental statistical tools which are not (very) well known by standard econometricians. This paper aims to fill this gap by explaining in a simple way one of these fundamental tools: namely, the Functional Central Limit Theorem. To this end, this paper analyzes the foundations and applicability of two versions of the Functional Central Limit Theorem within the framework of a unit root with a structural break. Initial attention is focused on the probabilistic structure of the time series to be considered. Thereafter, attention is focused on the asymptotic theory for nonstationary time series proposed by Phillips (1987a), which is applied by Perron (1989) to study the effects of an (assumed) exogenous structural break on the power of the augmented Dickey-Fuller test and by Zivot and Andrews (1992) to criticize the exogeneity assumption and propose a method for estimating an endogenous breakpoint. A systematic method for dealing with efficiency issues is introduced by Perron and Rodriguez (2003), which extends the Generalized Least Squares detrending approach due to Elliot et al. (1996). An empirical application is provided.

Keywords: Unit root testing; structural break; functional central limit theorem; Ornstein-Uhlenbeck process. (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2013
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http://revistas.pucp.edu.pe/index.php/economia/article/view/6379/6433 (application/pdf)

Related works:
Working Paper: UNDERSTANDING THE FUNCTIONAL CENTRAL LIMIT THEOREMS WITH SOME APPLICATIONS TO UNIT ROOT TESTING WITH STRUCTURAL CHANGE (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:pcp:pucrev:y:2013:i:71:p:107-149

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