Finite Sample Behaviour of the Level Shift Model using Quasi-Differenced Data

Gabriel Rodríguez

No 0604E, Working Papers from University of Ottawa, Department of Economics

Abstract: When using quasi-differenced data in a model where a break in the intercept is allowed, asymptotic distributions of the M, ADF, and PT statistics are the same as those in the model where only an intercept and a time trend are included. However, the finite sample behaviour for common sample sizes used in empirical applications, is very different. I calculate finite-sample critical values using two different methods to select the break point and the lag length. Comparison with asymptotic and finite-sample distributions of a model where only a constant and a time trend are included in the set of deterministic components show strong differences. In particular these differences are more clear for the M and PT statistics, while the ADF statistics is not affected too much. An empirical application is performed to show the pitfalls of using asymptotic or finite-sample critical values for a model where a break in the intercept has not been taken into account.

Keywords: Unit root test; GLS detrending; structural change; truncation lag; information criteria (search for similar items in EconPapers)
JEL-codes: C2 C5 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (3)

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