Publication: Effects of Applying Linear and Nonlinear Filters on Tests for Unit Roots with Additive Outliers
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2002
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Abstract
Conventional univariate Dickey-Fuller tests tend to produce spurious stationarity when
there exist additive outlying observations in the time series. Correct critical values are usually
obtained by adding dummy variables to the Dickey-Fuller regression. This is a nice theoretical
result but not attractive from the empirical point of view since almost any result can be obtained just by a convenient selection of dummy variables. In this paper we suggest a robust procedure based on running Dickey-Fuller tests on the trend component instead of the original series. We provide both finite-sample and large-sample justifications. Practical implementation is illustrated through an empirical example based on the US/Finland real exchange rate series.
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Additive outliers, Dickey-Fuller test, Linear and nonlinear filtering, Bootstrap