Lag truncation and the local asymptotic distribution of the ADF test for a unit root

Research output: Contribution to journalArticle

Abstract

The issue of lag selection in ADF unit root testing is important, even asymptotically, for if the number of lags is not allowed to increase at a certain rate the test might not be correctly sized. However, size control is not the only concern. Indeed, simulations have repeatedly shown how increasing lag lengths tend to be associated with reductions in power, thus adding to the well-known low power problem when the alternative is local to the unit root. But while the simulation evidence is plentiful, there is as of yet almost no asymptotic results that can be used to ascertain whether lag length has any effect on the local asymptotic power of the ADF test. The purpose of the present paper is to fill this gap in the literature.

Details

Authors
Organisations
External organisations
  • Maastricht University
  • Deakin University
Research areas and keywords

Subject classification (UKÄ) – MANDATORY

  • Probability Theory and Statistics

Keywords

  • ADF test, Lag selection, Local asymptotic power, Unit root testing
Original languageEnglish
Pages (from-to)2109-2118
Number of pages10
JournalStatistical Papers
Volume60
Issue number6
Early online date2017 May 11
Publication statusPublished - 2019 Dec
Publication categoryResearch
Peer-reviewedYes