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Unit Root Testing under a Local Break in Trend using Partial Information on the Break Date *
Author(s) -
Harvey David I.,
Leybourne Stephen J.,
Robert Taylor A.M.
Publication year - 2014
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/obes.12013
Subject(s) - unit root , unit root test , root (linguistics) , structural break , econometrics , allowance (engineering) , shock (circulatory) , sample (material) , mathematics , economics , physics , operations management , cointegration , medicine , philosophy , linguistics , thermodynamics
We consider unit root testing allowing for a break in trend when partial information is available regarding the location of the break date. This takes the form of knowledge of a relatively narrow window of data within which the break takes place, should it occur at all. For such circumstances, we suggest employing a union of rejections strategy, which combines a unit root test that allows for a trend break somewhere within the window with a unit root test that makes no allowance for a trend break. Asymptotic and finite sample evidence shows that our suggested strategy works well, provided that, when a break does occur, the partial information is correct. An empirical application to UK interest rate data containing the 1973 ‘oil shock’ is also considered.