Effects of Applying Linear and Nonlinear Filters on Tests for Unit Roots with Additive Outliers

Miguel A. Arranz and Francesc Marmol
Authors registered in the RePEc Author Service: Alvaro Escribano

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: Conventional univariate Dickey-Fuller tests tend to produce spurious stationarity when there exist additive outlying observations in the time series. Correct critical values are usually obtained by adding dummy variables to the Dickey-Fuller regression. This is a nice theoretical result but not attractive from the empirical point of view since almost any result can be obtained just by a convenient selection of dummy variables. In this paper we suggest a robust procedure based on running Dickey-Fuller tests on the trend component instead of the original series. We provide both finite-sample and large-sample justifications. Practical implementation is illustrated through an empirical example based on the US/Finland real exchange rate series.

Keywords: Additive; outliers; Dickey-Fuller; test; Linear; and; nonlinear; filtering; Bootstrap (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (1)

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