Speci cation Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior

Peter Phillips, Shuping Shi and Jun Yu

Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics

Abstract: Right-tailed unit root tests have proved promising for detecting exuberance in economic and financial activities. Like left-tailed tests, the limit theory and test performance are sensitive to the null hypothesis and the model specification used in parameter estimation. This paper aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focussing on the sup ADF test of Phillips, Wu and Yu (2011), which implements a right- tailed ADF test repeatedly on a sequence of forward sample recursions. We analyze and compare the limit theory of the sup ADF test under different hypotheses and model specifications. The size and power properties of the test under various scenarios are examined in simulations and some recommendations for empirical practice are given. Empirical applications to the Nasdaq and to Australian and New Zealand housing data illustrate these specification issues and reveal their practical importance in testing.

Keywords: Unit root test; Mildly explosive process; Recursive regression; Size and power (search for similar items in EconPapers)
JEL-codes: C15 C22 (search for similar items in EconPapers)
Pages: 31 Pages
Date: 2011-11
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Published in SMU-SKBI CoFie Working Paper

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Related works:
Working Paper: Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior (2012)
Working Paper: Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior (2012)
Working Paper: Specification Sensitivity in Right-Tailed Unit Root Testing for Explosive Behavior (2011)
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