Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 536: Cost of Misspecification in Break-Model Unit-Root Tests

Florin G. Maican () and Richard J. Sweeney ()
Additional contact information
Florin G. Maican: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 GÖTEBORG, Sweden
Richard J. Sweeney: McDonough School of Business, Georgetown University, Postal: 37th and "O" Sts. , NW, Washington, DC, USA

Abstract: This paper examines power issues for the ADF and four break models (Perron 1989, Zivot and Andrews 1992) when the DGP corresponds to one of the break models. Choosing to test an incorrect break model can but need not greatly reduce the probability of rejecting the null. Break points that are relatively early in the sample period have substantial effects of increasing power. For modest shifts in time trends, simply including a time trend without shift in the model preserves power, but not for large time-trend shifts.

Keywords: Unit root; Monte Carlo; Break models

JEL-codes: C15; C22; C32; C33; E31; F31

18 pages, August 27, 2012

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