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TESTING FOR COEFFICIENT RANDOMNESS IN LOCAL-TO-UNITY AUTOREGRESSIONS

Published online by Cambridge University Press:  18 February 2025

Mikihito Nishi Open the ORCID record for Mikihito Nishi [Opens in a new window]
Mikihito Nishi*
Affiliation:
Hitotsubashi University
*
Address correspondence to Mikihito Nishi, Graduate School of Economics, Hitotsubashi University, Tokyo, Japan, e-mail: [email protected].
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Abstract

This study proposes a test for coefficient randomness in autoregressive models where the autoregressive coefficient is local to unity, which is empirically relevant given earlier work. Under this specification, we analyze the effect of the correlation between the random coefficient and disturbance on the properties of tests, a matter that remains largely unexplored in the literature. Our analysis reveals that tests proposed in earlier studies can have poor power when the correlation is moderate to large. The test proposed here is designed to have power functions robust to the correlation. A modified version of the test is suggested that can be applied when the disturbance is serially correlated and conditionally heteroskedastic. The test is shown to have better power properties than existing ones in large and finite samples.

Type
ARTICLES
Information
Econometric Theory , First View , pp. 1 - 27
Copyright
© The Author(s), 2025. Published by Cambridge University Press

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Footnotes

I am grateful to the editor Peter Phillips, the co-editor Giuseppe Cavaliere, and two anonymous referees for their constructive comments and suggestions. I am greatly indebted to Eiji Kurozumi, my advisor, for discussions and his help, support and encouragement. I also thank the participants in a conference at Osaka University for their helpful comments and suggestions. All errors are mine.

References

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