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Markov regime switching and unit root tests

Charles Nelson, Jeremy Piger () and Eric Zivot ()

No 2001-013, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate the power and size performance of unit root tests when the data undergo Markov regime switching. All tests, including those robust to a single break in trend growth rate, have low power against a process with a Markov-switching trend. Under the null hypothesis, we find previously documented size distortions in Dickey-Fuller type tests caused by a single break in trend growth rate or variance do not generalize to most parameterizations of Markov switching in trend or variance. However, Markov switching in variance can lead to overrejection in tests allowing for a single break in the level of trend.

Keywords: time series analysis; Business cycles (search for similar items in EconPapers)
Date: 2001
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Published in Journal of Business and Economic Statistics, October 2001, 19(4), pp. 404-15

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Journal Article: Markov Regime Switching and Unit-Root Tests (2001)
Working Paper: Markov regime-switching and unit root tests (2000) Downloads
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