Point Optimal Invariant Tests of a Unit Root in Models with Structural Change

Mehmet Balcilar

No 15-50, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: This study proposes tests for the null hypothesis of a unit root against shifting trend stationary alternatives. In particular, models with structural change in the form of level or trend shifts are studied. Roots local-to-unity are addressed in models with structural change and asymptotic power functions of the tests are derived using local-to-unity asymptotic framework. These tests have good power properties against shifting trend stationary alternatives. Tests in the presence of multiple shifts are also examined. The asymptotic distributions of the tests are derived under exogenous and endogenous shift point assumptions. The asymptotic and finite sample percentiles of the tests are tabulated using Monte Carlo integration. Monte Carlo simulations reveal that tests have good power and size properties against various alternatives.

Keywords: Unit roots; structural change; quasi-differencing (search for similar items in EconPapers)
JEL-codes: C22 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2007-08
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-50.pdf First version, 2007 (application/pdf)

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