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Instead of removing the years of possible events that might cause the break,
Null Hypothesis:
Alternative Hypothesis: can be represented by a trend-stationary process with one-time break in the
trend occurring at an unknown point in time.
The goal is to estimate the breakpoint that gives the most weight to the trend-stationary alternative i.e, the
least favorable result for the null hypothesis using
ranging from
Then , it is set that , and standard t statistics,is computed
Following Perrons ADF testing strategy, the regression equations to test for a unit root are:
(1)
(2)
(3)
Break years that minimizes the one-sided t-statistic for testing does correspond to some
economic events that might create a break actually in some of the series, and to some dates in
which an economic interpretation is not possible at all.
But mainly, the structural breaks in data caused by Great Depression and Oil Crisis are catched
by this endogenous model, as of Perrons, although a few quarters differ.
Zivot&Andrews breakpoint algorithm is generally, though not completely, consistent with the
subjective selection procedure of Perrons.
However, when is not exogenously determined, Perrons critical values are no longer can be used to
test the unit-root hypothesis since Perrons unit root tests are biased toward rejecting the unit-root
hypothesis because critical values are too small in absolute value.
where denotes the size left-tail critical value from the asymptotic distribution of
Finite-Sample Results
Sample size for the series under consideration of Zivot&Andrews range from T=62 to T=111
Thus, Zivot&Andrews asymptotic critical values may differ from the appropriate finitesample critical values.
Critical values of finite sample generated by Monte Carlo Simulation
Finite-Sample Results
Zivot&Andrews suppose the errors driving the data series are normal processes.
In this case, the first differences of the series are normal processes, possibly with nonzero
mean, under the null hypothesis.
To determine p and q, models are fit to first differences of each series and the model-selection
criteria of Akaike (1972) and Schwarz (1978) is sed to choose the optimal with
Then Zivot&Andrews treat the optimal estimated models as the true data-generating process for
the errors of each of the series.
It is seen that in most cases Akaike and Schwarz criteria has selected the same model, in those
they did not, the most parsimonious model is selected.
Finite-Sample Results
To determine the finite-sample distributions of the test-statistics under the null-hypothesis with
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Empirical Applications
Zivot &Andrews(1992) also provides an application of the unit-root test to the data series that
Perron(1989) also analysed.
There are two differences;
1) Break years defining the dummy variables are slightly different
2) Z&A do not impose a structural break under the null hypothesis
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Empirical Applications
Empirical Applications
Empirical Applications
Empirical Applications
Empirical Applications
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