Explosive behaviour and long memory with an application to European bond yield spreads. (14th May 2018)

• Record Type: Journal Article
• Authors: Kruse, Robinson; Wegener, Christoph
• Other Names: Beckmann Joscha guestEditor.; Czudaj Robert L. guestEditor.; Koop Gary guestEditor.
• Is Part Of: Scottish journal of political economy. Volume 66:Number 1(2019)
• Page Start: 139
• Page End: 153
• Publication Date: 2018-05-14
• Subjects: Great Britain -- Economic conditions -- 1945-1964 -- Periodicals; Great Britain -- Economic conditions -- 1964-1979 -- Periodicals; Great Britain -- Economic conditions -- 1979-1997 -- Periodicals; 330.9411005
• DOI: 10.1111/sjpe.12179
• Languages: English
• ISSNs: 0036-9292

Abstract

Abstract: This article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al . (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size‐controlled test with increased power. As a complement, we consider the Lagrange Multiplier test against long memory by Tanaka (1999). We study European government bond yield spreads during the financial crisis.