A Fixed-b Perspective on the Phillips-Perron Unit Root Tests

Vogelsang, Timothy J. and Wagner, MartinORCID: https://orcid.org/0000-0002-6123-4797 (July 2011) A Fixed-b Perspective on the Phillips-Perron Unit Root Tests. Former Series > Working Paper Series > IHS Economics Series 272


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Abstract: We extend fixed-b asymptotic theory to the nonparametric Phillips-Perron (PP) unit root tests. We show that the fixed-b limits depend on nuisance parameters in a complicated way. These non-pivotal limits provide an alternative theoretical explanation for the well known finite sample problems of PP tests. We also show that the fixed-b limits depend on whether deterministic trends are removed using one-step or two-step approaches, contrasting the asymptotic equivalence of the one- and two-step approaches under a consistency approximation for the long run variance estimator. Based on these results we introduce modified PP tests that allow for fixed-b inference. The theoretical analysis is cast in the framework of near-integrated processes which allows to study the asymptotic behavior both under the unit root null hypothesis as well as for local alternatives. The performance of the original and modified tests is compared by means of local asymptotic power and a small simulation study.;

Item Type: IHS Series
Keywords: 'Nonparametric kernel estimator' 'Long run variance' 'Detrending' 'One-step' 'Two-step'
Classification Codes (e.g. JEL): C12, C13, C32
Date Deposited: 26 Sep 2014 10:39
Last Modified: 08 Apr 2024 13:46
ISBN: 1605-7996
URI: https://irihs.ihs.ac.at/id/eprint/2081

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