The size of the nonstationary component and its effect on tests for unit roots |
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| Authors: | P. C. Liu J. Praschnik |
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| Affiliation: | 1. Department of Economics, University of Miami, P.O. Box 248126, 33124, Coral Gables, FL
2. Department of Economics, University of Florida, 224 Matherly Hall, 32611, Gainesville, FL
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| Abstract: | We consider a nonstationary time series that is composed of a stationary and nonstationary component. Monte Carlo experiments show that common unit root tests have probabilities of committing a type I error that significantly exceed the level of significance. We find that the probabilities vary according to the relative size of the nonstationary component. |
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