Various unit roots tests are suggested over the years. However, many of them suffer severe size problems as well as low power. Recently, Ng and Perron (Econometrica, 69, 1519-1554, 2001) propose new modelling strategy that yields good power and reliable size. This letter applies their testing method to the Brazilian inflation rate, which is contaminated by various government interventions to bring hyperinflation under control and for which standard unit root tests produce unintuitive results. The new method is found to yield reliable results for the current data and a possible explanation is also provided for its performance.
This note shows that a very simple model can generate returns that resemble most of the temporal and distributional behavior of long returns surprisingly well. The model is based on the stochastic unit root process introduced in Granger and Swanson (1997).
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