Publication Type

Journal Article

Version

submittedVersion

Publication Date

12-2020

Abstract

Limit theory for regressions involving local to unit roots (LURs) is now used extensively in time series econometric work, establishing power properties for unit root and cointegration tests, assisting the construction of uniform confidence intervals for autoregressive coefficients, and enabling the development of methods robust to departures from unit roots. The present paper shows how to generalize LUR asymptotics to cases where the localized departure from unity is a time varying function rather than a constant. Such a functional local unit root (FLUR) model has much greater generality and encompasses many cases of additional interest that appear in practical work, including structural break formulations that admit subperiods of unit root, local stationary and local explosive behavior within a given sample. Point optimal FLUR tests are constructed in the paper to accommodate such cases and demonstrate how the power envelope changes in situations of practical interest. Against FLUR alternatives, conventional constant point optimal tests can be asymptotically infinitely deficient in power, with poor finite sample power performance particularly when the departure from unity occurs early in the sample period. New analytic explanation for this phenomenon is provided. Simulation results are reported and some implications for empirical practice are examined.

Keywords

Functional local unit root, Local to unity, Uniform confidence interval, Unit root model

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

219

Issue

2

First Page

231

Last Page

259

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2020.03.003

Publisher

Elsevier: 24 months

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jeconom.2020.03.003

Download

Included in

Econometrics Commons

Share

COinS