Get access

Unit Root Testing under a Local Break in Trend using Partial Information on the Break Date

Authors


  • We thank the editor, Anindya Banerjee, and two anonymous referees for their helpful and constructive comments on an earlier version of this article. Financial support provided by the Economic and Social Research Council of the United Kingdom under research grant RES-000-22-3882 is gratefully acknowledged by the authors.

Abstract

We consider unit root testing allowing for a break in trend when partial information is available regarding the location of the break date. This takes the form of knowledge of a relatively narrow window of data within which the break takes place, should it occur at all. For such circumstances, we suggest employing a union of rejections strategy, which combines a unit root test that allows for a trend break somewhere within the window with a unit root test that makes no allowance for a trend break. Asymptotic and finite sample evidence shows that our suggested strategy works well, provided that, when a break does occur, the partial information is correct. An empirical application to UK interest rate data containing the 1973 ‘oil shock’ is also considered.

Ancillary