Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 580: Dickey-Fuller Type of Tests against Nonlinear Dynamic Models

Changli He () and Rickard Sandberg ()
Additional contact information
Changli He: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Rickard Sandberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In this paper we introduce several test statistics of testing the null hypotheses of a random walk (with or without drift) against models that accommodate a smooth nonlinear shift in the level, the dynamic structure, and the trend. We derive analytical limiting distributions for all tests. Finite sample properties are examined. The performance of the tests is compared to that of the classical unit root tests by Dickey-Fuller and Phillips and Perron, and is found to be superior in terms of power.

Keywords: Dickey-Fuller test; LSTAR(p); LSTART(p); Nonlinear trends; Parameter constancy; Unit root; Brownian motion

JEL-codes: C12; C22; C52

37 pages, January 23, 2005

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