Unit Root Testing with Slowly Varying Trends

44 Pages Posted: 21 Sep 2016  

Sven Otto

University of Cologne - Institute of Econometrics and Statistics

Date Written: September 20, 2016

Abstract

We propose a unit root test for time series with a nonparametric trend component using a rolling window scheme with overlapping blocks. For both fixed-b and small-b blocklength asymptotics we derive limiting distributions that are robust under heteroskedasticity. By pre-whitening the series we account for autocorrelation. In a Monte Carlo simulation with slowly varying trend components both the fixed-b and small-b tests yield good size and higher power for near integrated alternatives than conventional unit root tests. An application to quarterly inflation rates of 22 countries provides evidence that inflation rates are stationary around a slowly varying trend.

Keywords: Unit root testing, nonlinear trends, heteroskedasticity, inflation

JEL Classification: C12, C14, C22, E31

Suggested Citation

Otto, Sven, Unit Root Testing with Slowly Varying Trends (September 20, 2016). 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

Paper statistics

Downloads
37
Abstract Views
180