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Unit Root Testing with Slowly Varying Trends

46 Pages Posted: 21 Sep 2016 Last revised: 5 Oct 2017

Sven Otto

University of Cologne - Institute of Econometrics and Statistics

Date Written: October 5, 2017

Abstract

A unit root test is proposed for time series with a nonparametric trend component using a pooled regression of overlapping blocks. The class of trend functions considered includes any boundedly differentiable trend function with finitely many breaks. Limiting null-distributions of the pseudo t-statistic of the pooled regression are derived under two different block asymptotics. Small-b asymptotics yields a standard normal distribution and under fixed-b asymptotics a functional of Brownian motions is obtained. A nuisance parameter correction provides heteroskedasticity robust tests and autocorrelation is accounted for by pre-whitening. For both tests a Monte Carlo study with slowly varying trends yields both good size and improved power results when compared to conventional unit root tests.

Keywords: Unit root testing, nonlinear trends, heteroskedasticity

JEL Classification: C12, C14, C22

Suggested Citation

Otto, Sven, Unit Root Testing with Slowly Varying Trends (October 5, 2017). Available at SSRN: https://ssrn.com/abstract=2841345 or http://dx.doi.org/10.2139/ssrn.2841345

Sven Otto (Contact Author)

University of Cologne - Institute of Econometrics and Statistics ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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