Spurious Rejections with Endogenous Break Unit Root Tests in the Presence of Outliers and Breaks

Unit root tests with structural break developed by Zivot and Andrews (1992 Zivot , E. , Andrews , D. W. K. ( 1992 ). Further evidence on the great crash, the oil price shock and the unit root hypothesis . Journal of Business and Economic Statistics 10 : 251 – 270 .Taylor & Francis Online], Web of Science ®] , Google Scholar]) and Perron and Rodriguez (2003 Perron , P. , Rodriguez , G. ( 2003 ). GLS detrending, efficient unit root tests and structural change . Journal of Econometrics 115 : 1 – 27 .Crossref], Web of Science ®] , Google Scholar]) in the presence of additive outliers and breaks are studied by simulation experiments. The results show that the Zivot–Andrews test appears to have size distortions due to the additive outliers whereas the Perron–Rodriguez test exhibits good properties of size and power. However, the two tests are biased when a second break is present but not taken into account. Furthermore, these endogenous break unit root tests tend to determine the break point incorrectly at one period behind the true break point, leading to spurious rejections of the unit root null hypothesis.