PHYS 1061 Study Guide - Quiz Guide: Time Series, Structural Break, Trend Stationary
Document Summary
H1: yt i(1) and do not reject h0 and reject h0 and reject h0 and do not reject h0. The standard dickey-fuller-type unit root tests presented above do not perform well if there are structural breaks in the series. The tests have low power in such circumstances and they fail to reject the unit root null hypothesis when it is incorrect as the slope parameter in the regression of yt on yt 1 is biased towards unity. The larger the break and the smaller the sample, the lower the power of the test. Unit root tests are also oversized in the presence of structural breaks. Perron (1989) demonstrates that after allowing for structural breaks in the tests, a whole raft of macroeconomic series may be stationary. He argues that most economic time series are best characterised by broken trend stationary processes, i. e. a deterministic trend but with a structural break.
