On maintaining the power of the Kapetanios-Snell-Shin (KSS) test under uncertain initial conditions
This article investigates the impact of initial condition (specifically, the deviation of the initial observation from the underlying deterministic component) on the power properties of the nonlinear Kapetanios- Snell-Shin (KSS) unit root test. While the Generalized Least Squares (GLS)-detrended KSS test has significant power advantage over the Ordinary Least Squares (OLS)-detrended KSS test if the initial deviation is small, the opposite occurs if the initial deviation is large. These results are similar to those found previously for the Dickey-Fuller (DF) test. To maintain good power properties across different initial conditions, a Union of Rejections (UR) strategy is adopted; the strategy is demonstrated to be useful.
Applied Economics Letters