Markov regime-switching and unit root tests

Charles Nelson, Jeremy Piger and Eric Zivot (ezivot@u.washington.edu)

No 683, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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)
Date: 2000
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Markov Regime Switching and Unit-Root Tests (2001)
Working Paper: Markov regime switching and unit root tests (2001)
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