Publication Type

Working Paper

Publication Date

9-2017

Abstract

This paper develops the asymptotic theory of the ordinary least squares estimator of the autoregressive (AR) coefficient in various AR models, when data is generated from trend-stationary models in different forms. It is shown that, depending on how the autoregression is specified, the commonly used right-tailed unit root tests may tend to reject the null hypothesis of unit root in favor of the explosive alternative. A new procedure to implement the right-tailed unit root tests is proposed. It is shown that when the data generating process is trend-stationary, the test statistics based on the proposed procedure cannot find evidence of explosiveness. Whereas, when the data generating process is mildly explosive, the unit root tests find evidence of explosiveness. Hence, the proposed procedure enables robust bubble testing under deterministic trends. Empirical implementation of the proposed procedure using data from the stock and the real estate markets in the US reveals some interesting findings. While our proposed procedure flags the same number of bubbles episodes in the stock data as the method developed in Phillips, Shi and Yu (2015a, PSY), the estimated termination dates by the proposed procedure match better with the data. For real estate data, all negative bubble episodes flagged by PSY are no longer regarded as bubbles by the proposed procedure.

Keywords

Autoregressive regressions, right-tailed unit root test, explosive and mildly explosive processes, deterministic trends, coefficient-based statistic, t-statistic

Discipline

Econometrics | Finance

Research Areas

Finance; Econometrics

First Page

1

Last Page

49

Publisher

Singapore Management University Economics & Statistics Working Papers, No. 14-2017

City or Country

Singapore

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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