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BOOTSTRAP UNIT ROOT TESTS FOR TIME SERIES WITH NONSTATIONARY VOLATILITY

Published online by Cambridge University Press:  06 September 2007

Giuseppe Cavaliere  and
A.M. Robert Taylor
Giuseppe Cavaliere
Affiliation:
University of Bologna
A.M. Robert Taylor
Affiliation:
University of Nottingham
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Abstract

The presence of permanent volatility shifts in key macroeconomic and financial variables in developed economies appears to be relatively common. Conventional unit root tests are unreliable in the presence of such behavior, having nonpivotal asymptotic null distributions. In this paper we propose a bootstrap approach to unit root testing that is valid in the presence of a wide class of permanent variance changes that includes single and multiple (abrupt and smooth transition) volatility change processes as special cases. We make use of the so-called wild bootstrap principle, which preserves the heteroskedasticity present in the original shocks. Our proposed method does not require the practitioner to specify any parametric model for the volatility process. Numerical evidence suggests that the bootstrap tests perform well in finite samples against a range of nonstationary volatility processes.We thank two anonymous referees, Paulo Rodrigues, Peter Phillips, and seminar participants at the URCT conference held in Faro, Portugal, September 29 to October 1, 2005, for helpful comments on previous versions of this paper.

Type
Research Article
Information
Econometric Theory , Volume 24 , Issue 1 , February 2008 , pp. 43 - 71
Copyright
© 2008 Cambridge University Press

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