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Explosive behaviour and long memory with an application to European bond yield spreads
Author(s) -
Kruse Robinson,
Wegener Christoph
Publication year - 2019
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12179
Subject(s) - explosive material , monte carlo method , econometrics , economics , yield (engineering) , bond , government bond , autocorrelation , unit root test , financial crisis , structural break , sample (material) , mathematics , statistics , keynesian economics , cointegration , physics , finance , thermodynamics , chemistry , organic chemistry
Abstract This article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al . (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size‐controlled test with increased power. As a complement, we consider the Lagrange Multiplier test against long memory by Tanaka (1999). We study European government bond yield spreads during the financial crisis.