Unit Root Testing with Unstable Volatility

Brendan Beare

No 2008-W06, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: It is known that unit root test statistics may not have the usual asymptotic properties when the variance of innovations is unstable. In particular, persistent changes in volatility can cause the size of unit root tests to differ from the nominal level. In this paper we propose a class of modified unit root test statistics that are robust to the presence of unstable volatility. The modification is achieved by purging heteroskedasticity from the data using a kernel estimate of volatility prior to the application of standard tests. In the absence of deterministic trend components, this approach delivers test statistics that achieve standard asymptotics under the null hypothesis of a unit root. When the data are homoskedastic, the local power of unit root tests is unchanged by our modification. We use Monte Carlo simulations to compare the finite sample performance of our modified tests with that of existing methods of correcting for unstable volatility.

Keywords: unit root; heteroskedasticity; nonstationary volatility. (search for similar items in EconPapers)
JEL-codes: C14 C22 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-05-05
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: Unit Root Testing with Unstable Volatility (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:nuf:econwp:0806

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