Lagrange multiplier unit root test in the presence of a break in the innovation variance

Amit Sen

Communications in Statistics - Theory and Methods, 2018, vol. 47, issue 7, 1580-1596

Abstract: We show that the Lagrange multiplier (LM) unit root test exhibits size distortions when a break in the innovation variance exists but is ignored. We develop a modified LM unit root test that is based on a generalized least-squares transformation of the original series. The asymptotic null distribution of the new modified LM unit root test is derived. Finite-sample simulation evidence shows that the modified LM unit root test maintains its size and has reasonable power against the trend stationary alternative.

Date: 2018
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DOI: 10.1080/03610926.2017.1321771

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