Bootstrap Model Averaging Unit Root Inference

McMaster University - Department of Economics Working Paper No. 2018-09

21 Pages Posted: 23 Apr 2018

See all articles by Bruce Hansen

Bruce Hansen

University of Wisconsin - Madison - Department of Economics

Jeffrey Racine

Department of Economics - McMaster University

Date Written: April 3, 2018

Abstract

Classical unit root tests are known to suffer from potentially crippling size distortions, and a range of procedures have been proposed to attenuate this problem, including the use of bootstrap procedures. It is also known that the estimating equation’s functional form can affect the outcome of the test, and various model selection procedures have been proposed to overcome this limitation. In this paper, we adopt a model averaging procedure to deal with model uncertainty at the testing stage. In addition, we leverage an automatic model-free dependent bootstrap procedure where the null is imposed by simple differencing (the block length is automatically determined using recent developments for bootstrapping dependent processes). Monte Carlo simulations indicate that this approach exhibits the lowest size distortions among its peers in settings that confound existing approaches, while it has superior power relative to those peers whose size distortions do not preclude their general use. The proposed approach is fully automatic, and there are no nuisance parameters that have to be set by the user, which ought to appeal to practitioners.

Keywords: inference, model selection, size distortion, time series

Suggested Citation

Hansen, Bruce and Racine, Jeffrey, Bootstrap Model Averaging Unit Root Inference (April 3, 2018). McMaster University - Department of Economics Working Paper No. 2018-09, Available at SSRN: https://ssrn.com/abstract=3156028 or http://dx.doi.org/10.2139/ssrn.3156028

Bruce Hansen (Contact Author)

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States

Jeffrey Racine

Department of Economics - McMaster University ( email )

Hamilton, Ontario L8S 4M4
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
40
Abstract Views
501
PlumX Metrics