A simple modification to improve the finite sample properties of Ng and Perron's unit root tests

Perron, Pierre; Qu, Zhongjun

doi:10.1016/j.econlet.2006.06.009

Cited by 165 publications

(111 citation statements)

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“…In that case the MIC will select considerably more lags than standard criteria and thus improve the size of the corresponding unit root test. Perron and Qu (2007) propose a further modification of these criteria, by suggesting that they should always be applied to OLS rather than QD detrended data even if the unit root test itself is based on QD detrended data. This will improve the power properties of the test, in particular for alternatives further from the null.…”

Section: Standard Lag Selection Criteriamentioning

confidence: 99%

“…Results for the constant and trend case are very similar, and are available on request. As recommended by Perron and Qu (2007), we apply the information criteria to OLS detrended data. As mentioned before, the volatility estimator used in the RSMAIC isσ 0,t , with the kernel K(·) taken as the Gaussian kernel and the bandwidth set equal to h = 0.1.…”

Section: Stochastic Volatility: σmentioning

confidence: 99%

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Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Cavaliere

Phillips

Smeekes³

et al. 2012

SSRN Journal

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A number of recently published papers have focused on the problem of testing for a unit root in the case where the driving shocks may be unconditionally heteroskedastic. These papers have, however, assumed that the lag length in the unit root test regression is a deterministic function of the sample size, rather than data-determined, the latter being standard empirical practice. In this paper we investigate the finite sample impact of unconditional heteroskedasticity on conventional data-dependent methods of lag selection in augmented Dickey-Fuller type unit root test regressions and propose new lag selection criteria which allow for the presence of heteroskedasticity in the shocks. We show that standard lag selection methods show a tendency to over-fit the lag order under heteroskedasticity, which results in significant power losses in the (wild bootstrap implementation of the) augmented Dickey-Fuller tests under the alternative. The new lag selection criteria we propose are shown to avoid this problem yet deliver unit roots with almost identical finite sample size and power properties as the corresponding tests based on conventional lag selection methods when the shocks are homoskedastic.

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Section: Standard Lag Selection Criteriamentioning

confidence: 99%

Section: Stochastic Volatility: σmentioning

confidence: 99%

Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Cavaliere

Phillips

Smeekes³

et al. 2012

SSRN Journal

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show abstract

“…whether OLS or QD detrending should be used in the lag length selection procedure itself; as elaborated on below, Perron and Qu (2007) find that OLS is superior in this context.…”

Section: Calculate Y Dmentioning

confidence: 99%

“…Although asymptotically the properties of the original criteria will be maintained, Ng and Perron (2001) show that these modified criteria yield large improvements over the standard criteria for the purpose of unit root testing, in particular if a negative moving average parameter is present in the short-run dynamics. Perron and Qu (2007) propose a further modification of these criteria, by suggesting that they should always be applied to OLS rather than QD detrended data even if the unit root test itself is based on QD detrended data. This will improve the power properties of the test, in particular for alternatives further from the null.…”

Section: Standard Lag Selection Criteriamentioning

confidence: 99%

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Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Cavaliere

Phillips

Smeekes

et al. 2014

Econometric Reviews

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A number of recently published papers have focused on the problem of testing for a unit root in the case where the driving shocks may be unconditionally heteroskedastic. These papers have, however, assumed that the lag length in the unit root test regression is a deterministic function of the sample size, rather than data-determined, the latter being standard empirical practice. In this paper we investigate the finite sample impact of unconditional heteroskedasticity on conventional data-dependent methods of lag selection in augmented Dickey-Fuller type unit root test regressions and propose new lag selection criteria which allow for the presence of heteroskedasticity in the shocks. We show that standard lag selection methods show a tendency to over-fit the lag order under heteroskedasticity, which results in significant power losses in the (wild bootstrap implementation of the) augmented Dickey-Fuller tests under the alternative. The new lag selection criteria we propose are shown to avoid this problem yet deliver unit root tests with almost identical finite sample size and power properties as the corresponding tests based on conventional lag selection methods when the shocks are homoskedastic.

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Evaluating Californian under‐age drunk driving laws: endogenous policy lags

Kuo

2011

J of Applied Econometrics

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SUMMARY When evaluating the effectiveness of a policy, most studies assume that the policy effect begins with the date of enactment. However, there often exists an endogenous policy lag, due to information acquisition and the cost of adjustment. Meanwhile, the policy impact may be a gradual implementation from one level to another, instead of a one‐time shift behavior. To account for these issues when evaluating the Californian under‐age drunk driving laws, this paper adopts two econometric techniques: the multiple structural change methodology and the smooth transition method. The methods detect two effective policy changes and also reveal the existence of policy lags. In addition, ignoring these lags leads to severely biased estimates of policy effects. A long transition period is identified for the first under‐age drunk driving policy, while an abrupt transition is found for the other. In summary, the paper shows that the two econometric techniques complement each other and will be useful for policy evaluation. Copyright © 2011 John Wiley & Sons, Ltd.

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A simple modification to improve the finite sample properties of Ng and Perron's unit root tests

Cited by 165 publications

References 2 publications

Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Lag Length Selection for Unit Root Tests in the Presence of Nonstationary Volatility

Evaluating Californian under‐age drunk driving laws: endogenous policy lags

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