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On the Behaviour of Phillips–Perron Tests in the Presence of Persistent Cycles
Author(s) -
Del Barrio Castro Tomás,
Rodrigues Paulo M. M.,
Taylor A. M. Robert
Publication year - 2015
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.12091
Subject(s) - unit root , econometrics , monte carlo method , parametric statistics , popularity , economics , component (thermodynamics) , mathematics , statistics , physics , psychology , thermodynamics , social psychology
In this paper, we analyse the impact of persistent cycles on the well‐known semi‐parametric unit root tests of Phillips and Perron (1988, Biometrika , Vol. 75, pp. 335–346). It is shown, both analytically and through Monte Carlo simulations, that the presence of complex (near) unit roots can severely bias the size properties of these tests. Given the popularity of these tests with applied researchers and their routine presence in most econometric software packages, the results presented in this paper suggest that practitioners should treat the outcomes of these tests with some caution when applied to data which display a strong cyclical component.