Markov regime-switching and unit root tests
Jeremy Piger () and
Eric Zivot ()
No 683, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)
We investigate the power and size performance of unit root tests when the true data generating process undergoes Markov regime-switching. All tests, including those robust to a single break in trend growth rate, have very low power against a process with a Markov-switching trend growth rate as in Lam (1990). However, for the case of business cycle non-linearities, unit root tests are very powerful against models used as alternatives to Lam (1990) that specify regime-switching in the transitory component of output. Under the null hypothesis, the received literature documents size distortions in Dickey-Fuller type tests caused by a single break in trend growth rate or variance. We find these results do not generalize to most parameterizations of Markov-switching in trend or variance. However, Markov-switching in variance can lead to over-rejection in tests robust to a single break in the level of trend.
Keywords: time series analysis; Business cycles (search for similar items in EconPapers)
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Journal Article: Markov Regime Switching and Unit-Root Tests (2001)
Working Paper: Markov regime switching and unit root tests (2001)
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