Specification Sensitivity in Right‐Tailed Unit Root Testing for Explosive Behaviour |
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| Authors: | Peter C B Phillips Shuping Shi Jun Yu |
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| Institution: | 1. Cowles Foundation, Yale University, University of Auckland, University of Southampton & Singapore Management University, , New Haven, CT,, USA;2. Research School of Finance, Actuarial Studies and Applied Statistics, The Australian National University, , ACT, 0200 Australia;3. Sim Kee Boon Institute for Financial Economics, School of Economics and Lee Kong Chian School of Business, Singapore Management University, , Singapore, 178903 |
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| Abstract: | This article aims to provide some empirical guidelines for the practical implementation of right‐tailed unit root tests, focusing on the recursive right‐tailed ADF test of Phillips et al. (2011b). We analyze and compare the limit theory of the recursive test under different hypotheses and model specifications. The size and power properties of the test under various scenarios are examined and some recommendations for empirical practice are given. Some new results on the consistent estimation of localizing drift exponents are obtained, which are useful in assessing model specification. Empirical applications to stock markets illustrate these specification issues and reveal their practical importance in testing. |
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