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On the Robustness of Unit Root Tests in the Presence of Double Unit Roots

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  • Haldrup, Niels Prof.
  • Lildholdt, Peter

Abstract

We examine some of the consequences on commonly used unit root tests when the underlying series is integrated of order two rather than of order one. It turns out that standard augmented Dickey-Fuller type of tests for a single unit root have excessive density in the explosive region of the distribution. The lower (stationary) tail, however, will be virtually unaffected in the presence of double unit roots. On the other hand, the Phillips-Perron class of semi-parametric tests is shown to diverge to plus infinity asymptotically and thus favoring the explosive alternative. Numerical simulations are used to demonstrate the analytical results and some of the implications in finite samples.

Suggested Citation

  • Haldrup, Niels Prof. & Lildholdt, Peter, 2000. "On the Robustness of Unit Root Tests in the Presence of Double Unit Roots," University of California at San Diego, Economics Working Paper Series qt2k0780sh, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt2k0780sh
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    More about this item

    Keywords

    unit root tests; Dickey-Fuller test; Phillips-Perron test;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric 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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