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ON THE ALTERNATIVE LONG-RUN VARIANCE RATIO TEST FOR A UNIT ROOT

Published online by Cambridge University Press:  15 March 2006

Ye Cai  and
Mototsugu Shintani
Ye Cai
Affiliation:
Vanderbilt University
Mototsugu Shintani
Affiliation:
Vanderbilt University
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Abstract

This paper investigates the effects of consistent and inconsistent long-run variance estimation on a test for a unit root, based on the generalization of the von Neumann ratio. The results from the Monte Carlo experiments suggest that the unit root tests based on an inconsistent estimator have less size distortion and more stability of size across different autocorrelation specifications as compared to the tests based on a consistent estimator. This improvement in size property, however, comes at the cost of a loss in power. The finite-sample power, in addition to the local asymptotic power, of the tests with an inconsistent estimator is shown to be much lower than that of conventional tests. This finding can be well generalized to the test for cointegration in a multivariate system. The paper also points out that combining consistent and inconsistent estimators in the long-run variance ratio test is one possibility of balancing the size and power.The authors thank two anonymous referees, Pentti Saikkonen, and participants of the 2004 Midwest Econometrics Group meetings, 2005 Spring Meetings of The Japanese Economic Association, and a workshop at Vanderbilt University for helpful comments and suggestions.

Type
Research Article
Information
Econometric Theory , Volume 22 , Issue 3 , June 2006 , pp. 347 - 372
Copyright
© 2006 Cambridge University Press

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