Specification sensitivity in right‐tailed unit root testing for explosive behaviour

• Main Authors: PHILLIPS, Peter C. B., SHI, Shuping, YU, Jun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2014
• Subjects: Unit root test; Mildly explosive process; Recursive regression; Size and power; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1796; https://ink.library.smu.edu.sg/context/soe_research/article/2795/viewcontent/P_ID_52649_SpecificationSensitivityRightTailedUnitRootTesting_2011_pp.pdf
• Institution: Singapore Management University

This article aims to provide some empirical guidelines for the practical implementation of right-tailed unit root tests, focusing on the recursive right-tailed ADF test of Phillips et al. (2011b). We analyze and compare the limit theory of the recursive test under different hypotheses and model specifications. The size and power properties of the test under various scenarios are examined and some recommendations for empirical practice are given. Some new results on the consistent estimation of localizing drift exponents are obtained, which are useful in assessing model specification. Empirical applications to stock markets illustrate these specification issues and reveal their practical importance in testing. © 2013 The Department of Economics, University of Oxford and John Wiley & Sons Ltd.