Publication Type

Journal Article

Version

submittedVersion

Publication Date

7-2018

Abstract

This article studies functional local unit root models (FLURs) in which the autoregressive coefficient may vary with time in the vicinity of unity. We extend conventional local to unity (LUR) models by allowing the localizing coefficient to be a function which characterizes departures from unity that may occur within the sample in both stationary and explosive directions. Such models enhance the flexibility of the LUR framework by including break point, trending, and multidirectional departures from unit autoregressive coefficients. We study the behavior of this model as the localizing function diverges, thereby determining the impact on the time series and on inference from the time series as the limits of the domain of definition of the autoregressive coefficient are approached. This boundary limit theory enables us to characterize the asymptotic form of power functions for associated unit root tests against functional alternatives. Both sequential and simultaneous limits (as the sample size and localizing coefficient diverge) are developed. We find that asymptotics for the process, the autoregressive estimate, and its t-statistic have boundary limit behavior that differs from standard limit theory in both explosive and stationary cases. Some novel features of the boundary limit theory are the presence of a segmented limit process for the time series in the stationary direction and a degenerate process in the explosive direction. These features have material implications for autoregressive estimation and inference which are examined in the article.

Keywords

Boundary asymptotics, functional local unit root, local to unity, sequential limits, simultaneous limits, unit root model

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Time Series Analysis

Volume

39

Issue

4

First Page

523

Last Page

562

ISSN

0143-9782

Identifier

10.1111/jtsa.12285

Publisher

Wiley

Embargo Period

1-29-2020

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1111/jtsa.12285

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