Data-Dependent Methods for the Lag Length Selection in Unit Root Tests with Structural Change

Ricardo Quineche and Gabriel Rodríguez

No 2015-404, Documentos de Trabajo / Working Papers from Departamento de Economía - Pontificia Universidad Católica del Perú

Abstract: We analyze the choice of the truncation lag for unit root tests as the ADF(GLS) and the M(GLS) tests proposed by Elliott et al. (1996) and Ng and Perron (2001) and extended to the context of structural change by Perron and RodrÌguez (2003). We consider the models that allows for a change in slope and a change in the intercept and slope at unknown break date, respectively. Using Monte-Carlo experiments, the truncation lag selected according to several methods as the AIC, BIC, M(AIC), MBIC is analyzed. We also include and analyze the performance of the hybrid version suggested by Perron and Qu (2007) which uses OLS instead of GLS detrended data when constructing the information criteria. All these methods are compared to the sequential t-sig method based on testing for the signiÖcance of coe¢ cients on additional lags in the ADF autoregression. Results show that the MGLS tests present explosive values associated with large values of the lag selected which happens more often when AIC, AIC(OLS) and t-sig are used to select the lag length. The values are so negative that imply an over rejection of the null hypothesis of a unit root. On the opposite side, lag length selected using M(AIC), M(AICOLS), M(BIC), M(BICOLS) methods lead to very small values of the M-tests implying very conservative results, that is, no rejection of the null hypothesis. These opposite power problems are not observed in the case of the ADF(GLS) test for which it is highly recommended. JEL Classification-JEL: C22, C52

Keywords: Unit Root Tests; Structural Change; Truncation Lag; GLS Detrending; Information Criteria; Sequential General to SpeciÖc t-sig Method. (search for similar items in EconPapers)
Pages: 29
Date: 2015
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (1)

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