We evaluate the impact of heavy-tailed innovations on some popular unit root tests. In the context of a near-integrated series driven by linear process shocks, we demonstrate that their limiting distributions are altered under infinite variance vis-a -vis finite variance. Reassuringly, however, simulation results suggest that the impact of heavy-tailed innovations on these tests is relatively small. We use the framework of Amsler and Schmidt () whereby the innovations have local-to-finite variances being generated as a linear combination of draws from a thin-tailed distribution (in the domain of attraction of the Gaussian distribution) and a heavy-tailed distribution (in the normal domain of attraction of a stable law). We also explore the properties of augmented Dickey-Fuller tests that employ Eicker-White standard errors, demonstrating that these can yield significant power improvements over conventional tests.
Unit Root Tests and Heavy-Tailed Innovations / Georgiev, Iliyan; Rodrigues, Paulo M. M.; Robert Taylor, A. M.. - In: JOURNAL OF TIME SERIES ANALYSIS. - ISSN 0143-9782. - STAMPA. - 38:5(2017), pp. 733-768. [10.1111/jtsa.12233]
Unit Root Tests and Heavy-Tailed Innovations
GEORGIEV, ILIYAN VLADIMIROV;
2017
Abstract
We evaluate the impact of heavy-tailed innovations on some popular unit root tests. In the context of a near-integrated series driven by linear process shocks, we demonstrate that their limiting distributions are altered under infinite variance vis-a -vis finite variance. Reassuringly, however, simulation results suggest that the impact of heavy-tailed innovations on these tests is relatively small. We use the framework of Amsler and Schmidt () whereby the innovations have local-to-finite variances being generated as a linear combination of draws from a thin-tailed distribution (in the domain of attraction of the Gaussian distribution) and a heavy-tailed distribution (in the normal domain of attraction of a stable law). We also explore the properties of augmented Dickey-Fuller tests that employ Eicker-White standard errors, demonstrating that these can yield significant power improvements over conventional tests.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.