Unit Root Tests and Structural Change when the Initial Observation is Drawn from its unconditional Distribution

Hui Liu and Gabriel Rodríguez
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Hui Liu: Department of Economics, University of Ottawa

No 0602E, Working Papers from University of Ottawa, Department of Economics

Abstract: Following Elliott (1999) and Perron and Rodríguez (2003), we develop unit root tests in the context of structural change models using GLS detrended data (Elliott, Rothenberg and Stock, 1996) when the initial observation is drawn from its unconditional distribution. We derive the limiting distributions of the M-tests (Stock, 1999; Perron, and Ng, 1996), the ADF statistic and a feasible optimal point test from which we derive the power envelope. Asymptotic power functions are calculated and compared with the case where the initial condition is not random. Finite sample size and power simulations under various forms of error processes are performed using different lag selection methods and two different methods to select the break point. Empirical applications are also provided.

Keywords: Initial Condition; Feasible Optimal Point Test; GLS Detrending; Power Envelope; Unit Root; Structural Change (search for similar items in EconPapers)
JEL-codes: C2 C5 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2006
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Citations: View citations in EconPapers (5)

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Journal Article: Unit root tests and structural change when the initial observation is drawn from its unconditional distribution (2006)
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