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Combining linear and nonlinear unit root tests with an application to PPP

Author

Listed:
  • Jeremy Nguyen

    (Swinburne Business School)

  • Jen-je Su

    (Griffith University)

Abstract

This paper suggests combining the linear Dickey-Fuller and nonlinear Kapetanios-Snell-Shin unit root tests in ways that explicitly acknowledge the underlying uncertainty regarding linearity versus nonlinearity. Simulation results show the proposed combination tests perform well. An empirical example is provided, where purchasing power parity is tested for 29 real exchange rates.

Suggested Citation

  • Jeremy Nguyen & Jen-je Su, 2015. "Combining linear and nonlinear unit root tests with an application to PPP," Economics Bulletin, AccessEcon, vol. 35(4), pages 2796-2801.
    • Handle: RePEc:ebl:ecbull:eb-15-00679
    as

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    References listed on IDEAS

    as
    1. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    2. Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2012. "Testing for unit roots in the presence of uncertainty over both the trend and initial condition," Journal of Econometrics, Elsevier, vol. 169(2), pages 188-195.
    3. Harvey, David I. & Leybourne, Stephen J. & Taylor, A.M. Robert, 2009. "Unit Root Testing In Practice: Dealing With Uncertainty Over The Trend And Initial Condition," Econometric Theory, Cambridge University Press, vol. 25(3), pages 587-636, June.
    4. Zhou, Su & Kutan, Ali M., 2011. "Is the evidence for PPP reliable? A sustainability examination of the stationarity of real exchange rates," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2479-2490, September.
    5. Christian Bayer & Christoph Hanck, 2013. "Combining non-cointegration tests," Journal of Time Series Analysis, Wiley Blackwell, vol. 34(1), pages 83-95, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    unit root; Dickey-Fuller; Kapetanios-Snell-Shin; union of rejection;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • F3 - International Economics - - International Finance

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