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Activity Number: 146
Type: Contributed
Date/Time: Monday, July 30, 2007 : 10:30 AM to 12:20 PM
Sponsor: Business and Economics Statistics Section
Abstract - #308926
Title: Unit Root Tests in the Presence of a Simultaneous Break in the Mean and the Innovation Variance
Author(s): Amit Sen*+
Companies: Xavier University
Address: Department of Economics, Cincinnati, OH, 45207-3212,
Keywords: Unit Root ; Break Date ; Innovation Break
Abstract:

Kim, Leybourne, and Newbold (2002, Journal of Econometrics) developed unit root tests that allow for a break in the innovation variance. Their tests are based on a consistent break-date estimator, and a modified GLS regression using the pre-break and post-break variance implied by the estimated break-date. We show that the break-date estimator of Kim, Leybourne, and Newbold (2002) is not consistent if there is a break in the mean under the alternative, and so we propose a modified estimator for the break-date. Implementing Kim, Leybourne, and Newbold's (2002) GLS strategy with the modified break-date estimator yields appropriate unit root tests in the presence of a break in the innovation variance that will also have power against the stationary alternative with a break in the mean. Application of the unit-root test is illustrated via application to the Thai Baht/U.S. $ exchange rate.

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Revised September, 2007