Publication Type

Journal Article

Version

submittedVersion

Publication Date

1-2023

Abstract

This paper develops the asymptotic theory of the least squares estimator of the autoregressive (AR) coefficient in an AR(1) regression with intercept when data is generated from a polynomial trend model in different forms. It is shown that the commonly used right-tailed unit root tests tend to favor the explosive alternative. A new procedure, which implements the right-tailed unit root tests in an AR(2) regression, is proposed. It is shown that when the data generating process has a polynomial trend, the test statistics based on the new procedure cannot find evidence of explosiveness. Whereas, when the data generating process is mildly explosive, the new procedure finds evidence of explosiveness. Hence, it enables robust bubble testing under polynomial trends. Empirical application of the proposed procedure using data from the U.S. real estate market reveals some interesting findings. In particular, all the negative bubble episodes flagged by the traditional method are no longer regarded as bubbles by the new procedure

Keywords

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

Discipline

Econometrics | Finance

Research Areas

Finance

Publication

Econometrics Journal

Volume

26

Issue

1

First Page

25

Last Page

44

ISSN

1368-4221

Identifier

10.1093/ectj/utac020

Publisher

Oxford University Press

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1093/ectj/utac020

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