Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Giuseppe Cavaliere, Peter Phillips, Stephan Smeekes and Robert Taylor

No 1844, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: A number of recently published papers have focused on the problem of testing for a unit root in the case where the driving shocks may be unconditionally heteroskedastic. These papers have, however, assumed that the lag length in the unit root test regression is a deterministic function of the sample size, rather than data-determined, the latter being standard empirical practice. In this paper we investigate the finite sample impact of unconditional heteroskedasticity on conventional data-dependent methods of lag selection in augmented Dickey-Fuller type unit root test regressions and propose new lag selection criteria which allow for the presence of heteroskedasticity in the shocks. We show that standard lag selection methods show a tendency to over-fit the lag order under heteroskedasticity, which results in significant power losses in the (wild bootstrap implementation of the) augmented Dickey-Fuller tests under the alternative. The new lag selection criteria we propose are shown to avoid this problem yet deliver unit roots with almost identical finite sample size and power properties as the corresponding tests based on conventional lag selection methods when the shocks are homoskedastic.

Keywords: Unit root test; Lag selection; Information criteria; Wild bootstrap; Nonstationary volatility (search for similar items in EconPapers)
JEL-codes: C15 C22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2012-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Econometric Reviews (April 2015), 34(4): 512-536

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Related works:
Journal Article: Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility (2015)
Working Paper: Lag length selection for unit root tests in the presence of nonstationary volatility (2011)
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