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Effects of Applying Linear and Nonlinear Filters on Tests for Unit Roots with Additive Outliers

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  • Arranz, Miguel A.
  • Escribano, Álvaro
  • Mármol, Francesc

Abstract

Conventional univariate Dickey-Fuller tests tend to produce spurious stationarity when there exist additive outlying observations in the time series. Correct critical values are usually obtained by adding dummy variables to the Dickey-Fuller regression. This is a nice theoretical result but not attractive from the empirical point of view since almost any result can be obtained just by a convenient selection of dummy variables. In this paper we suggest a robust procedure based on running Dickey-Fuller tests on the trend component instead of the original series. We provide both finite-sample and large-sample justifications. Practical implementation is illustrated through an empirical example based on the US/Finland real exchange rate series.

Suggested Citation

  • Arranz, Miguel A. & Escribano, Álvaro & Mármol, Francesc, 2002. "Effects of Applying Linear and Nonlinear Filters on Tests for Unit Roots with Additive Outliers," UC3M Working papers. Economics we20091101, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we20091101
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    1. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.

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    Keywords

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