The fragility of the KPSS stationarity test |
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Authors: | Nunzio Cappuccio Diego Lubian |
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Affiliation: | 1. Department of Economics, University of Padova, via del Santo 33, 35123, Padova, Italy 2. Department of Economics, University of Verona, via dell’Università, 37129, Verona, Italy
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Abstract: | Stationarity tests exhibit extreme size distortions if the observable process is stationary yet highly persistent. In this paper we provide a theoretical explanation for the size distortion of the KPSS test for DGPs with a broad range of first order autocorrelation coefficient. Considering a near-integrated, nearly stationary process we show that the asymptotic distribution of the test contains an additional term, which can potentially explain the amount of size distortion documented in previous simulation studies. |
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