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

Miguel A. Arranz, Alvaro Escribano () and Francesc Marmol

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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