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TESTING FOR A UNIT ROOT IN THE PRESENCE OF A POSSIBLE BREAK IN TREND

Published online by Cambridge University Press:  01 December 2009

David Harris ,
David I. Harvey ,
Stephen J. Leybourne  and
A.M. Robert Taylor
David Harris
Affiliation:
University of Melbourne
David I. Harvey
Affiliation:
University of Nottingham
Stephen J. Leybourne
Affiliation:
University of Nottingham
A.M. Robert Taylor*
Affiliation:
University of Nottingham
*
*Address correspondence to Robert Taylor, School of Economics, University of Nottingham, Nottingham NG7 2RD, UK; e-mail: [email protected].
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Abstract

We consider the issue of testing a time series for a unit root in the possible presence of a break in a linear deterministic trend at an unknown point in the series. We propose a new break fraction estimator which, where a break in trend occurs, is consistent for the true break fraction at rate Op(T−1). Unlike other available estimators, however, when there is no trend break, our estimator converges to zero at rate Op(T−1/2). Used in conjunction with a quasi difference (QD) detrended unit root test that incorporates a trend break regressor, we show that these rates of convergence ensure that known break fraction null critical values are asymptotically valid. Unlike available procedures in the literature, this holds even if there is no break in trend (the break fraction is zero). Here the trend break regressor is dropped from the deterministic component, and standard QD detrended unit root test critical values then apply. We also propose a second procedure that makes use of a formal pretest for a trend break in the series, including a trend break regressor only where the pretest rejects the null of no break. Both procedures ensure that the correctly sized (near-) efficient unit root test that allows (does not allow) for a break in trend is applied in the limit when a trend break does (does not) occur.

Type
ARTICLES
Information
Econometric Theory , Volume 25 , Issue 6: Newbold Conference Special Issue , December 2009 , pp. 1545 - 1588
Copyright
Copyright © Cambridge University Press 2009

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