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A Unit Root Test Using a Fourier Series to Approximate Smooth Breaks *
Author(s) -
Enders Walter,
Lee Junsoo
Publication year - 2012
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2011.00662.x
Subject(s) - unit root , fourier series , series (stratigraphy) , unit root test , mathematics , fourier transform , root (linguistics) , simple (philosophy) , fourier analysis , test (biology) , mathematical analysis , statistics , cointegration , geology , paleontology , linguistics , philosophy , epistemology
We develop a unit‐root test based on a simple variant of Gallant's (1981) flexible Fourier form. The test relies on the fact that a series with several smooth structural breaks can often be approximated using the low frequency components of a Fourier expansion. Hence, it is possible to test for a unit root without having to model the precise form of the break. Our unit‐root test employing Fourier approximation has good size and power for the types of breaks often used in economic analysis. The appropriate use of the test is illustrated using several interest rate spreads.