Asymptotic behaviour of tests for a unit root against an explosive alternative

Harvey, David I.; Leybourne, Stephen J.

Abstract

We compare the asymptotic local power of upper-tail unit root tests against an explosive alternative based on ordinary least squares (OLS) and quasi-differenced (QD) demeaning/detrending. We find that under an asymptotically negligible initialisation, the QD-based tests are near asymptotically efficient and generally offer superior power to OLS-based approaches; however, the power gains are much more modest than in the lower-tail testing context. We also find that asymptotically non-negligible initial conditions do not affect the power ranking in the same way as they do for lower-tail tests, with the QD-based tests retaining a power advantage in such cases.

Citation

Harvey, D. I., & Leybourne, S. J. (2014). Asymptotic behaviour of tests for a unit root against an explosive alternative. Economics Letters, 122(1), https://doi.org/10.1016/j.econlet.2013.11.006

• Journal Article Type: Article
• Publication Date: Jan 1, 2014
• Deposit Date: Apr 6, 2016
• Publicly Available Date: Apr 6, 2016
• Journal: Economics Letters
• Print ISSN: 0165-1765
• Electronic ISSN: 1873-7374
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 122
• Issue: 1
• DOI: https://doi.org/10.1016/j.econlet.2013.11.006
• Keywords: Unit root testing; Explosive autoregression; Asymptotic power; Initial condition
• Public URL: https://nottingham-repository.worktribe.com/output/997430
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S016517651300493X