Local Power of Andrews and Ploberger Tests Against Nearly Integrated, Nearly White Noise Process

Ai Deng ()

No WP2006-027, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: We find that the Andrews and Ploberger’s (1996) tests have unit local power against the nearly integrated, nearly white noise process (ref. Nabeya and Perron (1994)). Therefore, compared with the stationary local alternatives, higher power is expected when testing against such process. Monte Carlo simulation confirms our results. We apply the tests to monthly SP500 stock returns and strongly reject the martingale difference hypothesis.

Keywords: ARMA(1; 1); local power; Nearly integrated; nearly white noise process; stock returns (search for similar items in EconPapers)
JEL-codes: C12 (search for similar items in EconPapers)
Pages: 08 pages
Date: 2006-05
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