Improving Size and Power in the Unit Root Testing

Aarhus University Economics Paper No. 2005-02

34 Pages Posted: 18 Jun 2008

See all articles by Niels Haldrup

Niels Haldrup

Aarhus University, School of Economics and Management; CREATES

Michael Jansson

University of California, Berkeley - Department of Economics

Date Written: March 22, 2005

Abstract

A frequent criticism of unit root tests concerns the poor power and size properties that many of such tests exhibit. However, the past decade or so intensive research has been conducted to alleviate these problems and great advances have been made. The present paper provides a selective survey of recent contributions to improve upon both size and power of unit root tests and in so doing the approach of using rigorous statistical optimality criteria in the development of such tests is stressed. In addition to presenting tests where improved size can be achieved by modifying the standard Dickey-Fuller class of tests, the paper presents theory of optimal testing and the construction of power envelopes for unit root tests under different conditions allowing for serial correlation, deterministic components, assumptions regarding the initial condition, non-Gaussian errors, and the use of covariates.

Keywords: Unit roots, optimal tests, power envelope

JEL Classification: C12, C22

Suggested Citation

Haldrup, Niels and Jansson, Michael, Improving Size and Power in the Unit Root Testing (March 22, 2005). Aarhus University Economics Paper No. 2005-02. Available at SSRN: https://ssrn.com/abstract=1147594 or http://dx.doi.org/10.2139/ssrn.1147594

Niels Haldrup (Contact Author)

Aarhus University, School of Economics and Management ( email )

Universitetsparken
Aarhus, DK 8000 C
Denmark
+45 8942 1133 (Phone)
+45-8613-6334 (Fax)

CREATES ( email )

School of Economics and Management
Aarhus University
Aarhus, DK 8000 C
Denmark
+4589421613 (Phone)

HOME PAGE: http://www.creates.au.dk/en

Michael Jansson

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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