The Federal Reserve Board eagle logo links to home page

International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Markov Regime-Switching and Unit Root Tests
Charles R. Nelson; Jeremy Piger; Eric Zivot
2000-683  (September 2000)

Abstract:  We investigate the power and size performance of unit root tests when the true data generating process undergoes Markov regime-switching. All tests, including those robust to a single break in trend growth rate, have very low power against a process with a Markov-switching trend growth rate as in Lam (1990). However, for the case of business cycle non-linearities, unit root tests are very powerful against models used as alternatives to Lam (1990) that specify regime-switching in the transitory component of output. Under the null hypothesis, the received literature documents size distortions in Dickey-Fuller type tests caused by a single break in trend growth rate or variance. We find these results do not generalize to most parameterizations of Markov-switching in trend or variance. However, Markov-switching in variance can lead to over-rejection in tests robust to a single break in the level of trend.

Full paper (91 KB PDF)

Keywords
stochastic trends, deterministic trends, structural change, heteroskedasticity

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE


Home | IFDPs | List of 2000 IFDPs
Accessibility
To comment on this site, please fill out our feedback form.
Last update: July 19, 2001