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Specification Sensitivity in Right‐Tailed Unit Root Testing for Explosive Behaviour
Author(s) -
Phillips Peter C. B.,
Shi Shuping,
Yu Jun
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.12026
Subject(s) - unit root , explosive material , econometrics , unit root test , specification , statistical hypothesis testing , root (linguistics) , empirical research , computer science , sensitivity (control systems) , mathematics , statistics , engineering , cointegration , linguistics , chemistry , philosophy , organic chemistry , electronic engineering
This article aims to provide some empirical guidelines for the practical implementation of right‐tailed unit root tests, focusing on the recursive right‐tailed ADF test of Phillips et al . (2011b). We analyze and compare the limit theory of the recursive test under different hypotheses and model specifications. The size and power properties of the test under various scenarios are examined and some recommendations for empirical practice are given. Some new results on the consistent estimation of localizing drift exponents are obtained, which are useful in assessing model specification. Empirical applications to stock markets illustrate these specification issues and reveal their practical importance in testing.