On maintaining the power of the Kapetanios-Snell-Shin (KSS) test under uncertain initial conditions

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Su, Jen-Je
Nguyen, Tom
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2012
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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.

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Applied Economics Letters
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19
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9
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Applied economics
Time-series analysis
Banking, finance and investment
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