RALS-LM unit root test with trend breaks and non-normal errors: application to the Prebisch-Singer hypothesis

Junsoo Lee · James E. Payne

92 citations0/0 files storedStudies in Nonlinear Dynamics and Econometrics

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Monetary Policy and Economic Impact Market Dynamics and Volatility Diverse Scientific and Economic Studies

Abstract

Abstract This study proposes a new unit root test that allows for structural breaks in both the intercept and the slope, and adopts the residual augmented least squares (RALS) procedure to gain improved power when the error term follows a non-normal distribution. The new test using the RALS procedure is more powerful than the usual LM test which does not incorporate information on non-normal errors. Our test is free of nuisance parameters that indicate the locations of structural break. It is also free of the spurious rejection problem. Thus, the rejection of the null hypothesis can be considered as more accurate evidence of stationarity. We apply the new test on the recently extended Grilli and Yang index of 24 commodity series from 1900 to 2007. Our empirical findings provide significant evidence that primary commodity prices are stationary with one or two trend breaks. However, compared with past studies, our findings provide even weaker evidence to support the Prebisch-Singer hypothesis.

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References

2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks 1975The Distribution of Gains between Investing and Borrowing Countries 1992LM TESTS FOR A UNIT ROOT IN THE PRESENCE OF DETERMINISTIC TRENDS*1988Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows 1995Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power 2010The Prebisch-Singer Hypothesis: Four Centuries of Evidence 2010A sequential procedure to determine the number of breaks in trend with an integrated or stationary noise component 2014More Powerful LM Unit Root Tests with Non-normal Errors

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