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Impact of Model Specification Decisions on Unit Root Tests

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  • Atiq-ur-Rehman

    (International Islamic University)

Abstract

Performance of unit root tests depends on several specification decisions prior to their application, e.g., whether or not to include a deterministic trend. Since there is no standard procedure for making such decisions; therefore, the practitioners routinely make several arbitrary specification decisions. In Monte Carlo studies, the design of data generating process supports these decisions, but for real data, such specification decisions are often unjustifiable and sometimes incompatible with data. We argue that the problems posed by choice of initial specification are quite complex and the existing voluminous literature on this issue treats only certain superficial aspects of this choice. Outcomes of unit root tests are very sensitive to both choice and sequencing of these arbitrary specifications. This means that we can obtain results of our choice from unit root tests by varying these specifications.

Suggested Citation

  • Atiq-ur-Rehman, 2011. "Impact of Model Specification Decisions on Unit Root Tests," International Econometric Review (IER), Econometric Research Association, vol. 3(2), pages 22-33, September.
    • Handle: RePEc:erh:journl:v:3:y:2011:i:2:p:22-33
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    Cited by:

    1. Asad Zaman, 2012. "Methodological Mistakes and Econometric Consequences," International Econometric Review (IER), Econometric Research Association, vol. 4(2), pages 99-122, September.
    2. Muhammad Irfan Malik & Atiq-ur-Rehman, 2015. "Choice of Spectral Density Estimator in Ng-Perron Test: A Comparative Analysis," International Econometric Review (IER), Econometric Research Association, vol. 7(2), pages 51-63, September.
    3. Atiq-ur-Rehman, 2011. "Impact of Model Specification Decisions on Unit Root Tests," International Econometric Review (IER), Econometric Research Association, vol. 3(2), pages 22-33, September.

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    More about this item

    Keywords

    Model Specification; Trend Stationary; Difference Stationary;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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