Finite-Sample Properties of the GLS-Based Dickey-Fuller Test in the Presence of Breaks in Innovation Variance
DOI:
https://doi.org/10.17713/ajs.v33i3.444Abstract
Using local-to-unity detrending, the GLS-based Dickey-Fuller test has been shown to possess higher power than other available unit root tests. As a result, application of this easily implemented test has increased in recent years. In the present study the finite-sample size and power of the GLS-based Dickey-Fuller test is examined in the presence of breaks in innovation variance under the null. In contrast to the original Dickey-Fuller test which has been shown to suffer severe distortion in such circumstances, the GLS-basedtest latter exhibits robustness to all but the most extreme breaks in variance.
The results derived show the GLS-based test to be more robust to variance breaks than other modified Dickey-Fuller tests previously considered in the literature.
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