Faculty of Economics and Business Administration Publications Database

Seasonal Unit Root Tests under Structural Breaks

Rodrigues, Paulo M.M.
Volume: 25
Number: 1
Pages: 33 - 53
Month: 1
ISSN-Print: 0143-9782
Year: 2004
Keywords: Structural Breaks; Unit Roots; Seasonal Unit Root Tests
Abstract: In this paper, several seasonal unit root tests are analysed in the context of structural breaks at known time and a new break corrected test is suggested. We show that the widely used HEGY test, as well as an LM variant thereof, are asymptotically robust to seasonal mean shifts of finite magnitude. In finite samples, however, experiments reveal that such tests suffer from severe size distortions and power reductions when breaks are present. Hence, a new break corrected LM test is proposed to overcome this problem. Importantly, the correction for seasonal mean shifts bears no consequence on the limiting distributions, thereby maintaining the legitimacy of canonical critical values. Moreover, although this test assumes a breakpoint a priori, it is robust in terms of misspecification of the time of the break. This asymptotic property is well reproduced in finite samples. Based on a Monte-Carlo study, our new test is compared with other procedures suggested in the literature and shown to hold superior finite sample properties.