Testing for a unit root in a process exhibiting a structural break in the presence of GARCH errors

Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153 and Rew, A. (2002) Testing for a unit root in a process exhibiting a structural break in the presence of GARCH errors. Computational Economics, 20 (3). pp. 151-176. ISSN 1572-9974 doi: 10.1023/A:1020945428824

Abstract/Summary

This paper considers the effect of GARCH errors on the tests proposed byPerron (1997) for a unit root in the presence of a structural break. We assessthe impact of degeneracy and integratedness of the conditional varianceindividually and find that, apart from in the limit, the testing procedure isinsensitive to the degree of degeneracy but does exhibit an increasingover-sizing as the process becomes more integrated. When we consider the GARCHspecifications that we are likely to encounter in empirical research, we findthat the Perron tests are reasonably robust to the presence of GARCH and donot suffer from severe over-or under-rejection of a correct null hypothesis.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/24164
Identification Number/DOI	10.1023/A:1020945428824
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Springer
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