Estimating deterministic trends with an integrated or stationary noise component |
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Authors: | Pierre Perron Tomoyoshi Yabu |
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Institution: | 1. Department of Economics, Boston University, 270 Bay State Road, Boston, MA, 02215, United States;2. Faculty of Business and Commerce, Keio University, Tokyo, 108-8345, Japan |
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Abstract: | We propose a test for the slope of a trend function when it is a priori unknown whether the series is trend-stationary or contains an autoregressive unit root. The procedure is based on a Feasible Quasi Generalized Least Squares method from an AR(1) specification with parameter α, the sum of the autoregressive coefficients. The estimate of α is the OLS estimate obtained from an autoregression applied to detrended data and is truncated to take a value 1 whenever the estimate is in a T−δ neighborhood of 1. This makes the estimate “super-efficient” when α=1 and implies that inference on the slope parameter can be performed using the standard Normal distribution whether α=1 or |α|<1. Theoretical arguments and simulation evidence show that δ=1/2 is the appropriate choice. Simulations show that our procedure has better size and power properties than the tests proposed by Bunzel, H., Vogelsang, T.J., 2005. Powerful trend function tests that are robust to strong serial correlation with an application to the Prebish–Singer hypothesis. Journal of Business and Economic Statistics 23, 381–394] and Harvey, D.I., Leybourne, S.J., Taylor, A.M.R., 2007. A simple, robust and powerful test of the trend hypothesis. Journal of Econometrics 141, 1302–1330]. |
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Keywords: | C22 |
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