A new unit root test with two structural breaks in level and slope at unknown time

Paresh Kumar Narayan · Stephan Popp

725 citations0/0 files storedJournal of Applied Statistics

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Monetary Policy and Economic Impact Statistical and numerical algorithms Diverse Scientific and Economic Studies

Abstract

In this paper, we propose a new augmented Dickey–Fuller-type test for unit roots which accounts for two structural breaks. We consider two different specifications: (a) two breaks in the level of a trending data series and (b) two breaks in the level and slope of a trending data series. The breaks whose time of occurrence is assumed to be unknown are modeled as innovational outliers and thus take effect gradually. Using Monte Carlo simulations, we show that our proposed test has correct size, stable power, and identifies the structural breaks accurately.

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References

1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 2002Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1982Trends and random walks in macroeconmic time series 1992Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis 1988Trends and random walks in macroeconomic time series 2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks 1997Further evidence on breaking trend functions in macroeconomic variables 1997Multiple Trend Breaks and the Unit-Root Hypothesis

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