Powerful Unit Root Tests Free of Nuisance Parameters. (21st January 2016)

• Record Type: Journal Article
• Authors: Hosseinkouchack, Mehdi; Hassler, Uwe
• Is Part Of: Journal of time series analysis. Volume 37:Number 4(2016:Jul.)
• Page Start: 533
• Page End: 554
• Publication Date: 2016-01-21
• Subjects: Variance ratio -- tuning parameter free -- local‐to‐unity -- Karhunen–Loève. JEL. C12 -- C22; Time-series analysis -- Periodicals; 519.232
• DOI: 10.1111/jtsa.12172
• Languages: English
• ISSNs: 0143-9782

Abstract

Abstract : We propose a variance ratio‐type unit root test where the nuisance parameter cancels asymptotically under both the null of a unit root and a local‐to‐unity alternative. Critical values and asymptotic power curves can be computed using standard numerical techniques. Our test exhibits higher power compared with tests that share the virtue of being free of tuning parameters. In fact, the local asymptotic power curves of our procedure get close to the power functions of the point optimal test, where the latter suffers from the drawback of having to correct for a nuisance parameter consistently.