Lagrange multiplier unit root test in the presence of a break in the innovation variance |
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Authors: | Amit Sen |
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Affiliation: | Department of Economics, Xavier University, Victory Parkway, Cincinnati, OH, USA |
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Abstract: | We show that the Lagrange multiplier (LM) unit root test exhibits size distortions when a break in the innovation variance exists but is ignored. We develop a modified LM unit root test that is based on a generalized least-squares transformation of the original series. The asymptotic null distribution of the new modified LM unit root test is derived. Finite-sample simulation evidence shows that the modified LM unit root test maintains its size and has reasonable power against the trend stationary alternative. |
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Keywords: | Break-date innovation break Lagrange multiplier unit root. |
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