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

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Lag truncation and the local asymptotic distribution of the ADF test for a unit root. / Aylar, Emre; Smeekes, Stephan; Westerlund, Joakim.

In: Statistical Papers, Vol. 60, No. 6, 12.2019, p. 2109-2118.

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TY - JOUR

T1 - Lag truncation and the local asymptotic distribution of the ADF test for a unit root

AU - Aylar, Emre

AU - Smeekes, Stephan

AU - Westerlund, Joakim

PY - 2019/12

Y1 - 2019/12

N2 - 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.

AB - 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.

KW - ADF test

KW - Lag selection

KW - Local asymptotic power

KW - Unit root testing

UR - http://www.scopus.com/inward/record.url?scp=85018695508&partnerID=8YFLogxK

U2 - 10.1007/s00362-017-0911-y

DO - 10.1007/s00362-017-0911-y

M3 - Article

VL - 60

SP - 2109

EP - 2118

JO - Statistical Papers

JF - Statistical Papers

SN - 0039-0631

IS - 6

ER -