The question is generally about what test equation should I use for testing the unit root of a series with two, say, intercept breaks. But I have specific questions.

The whole procedure is as follows, but was really not sure if it's theoretically sound....(I am not a econometric student)

  1. I inspected the graph and can see two breaking points.
  2. I used EViews to run a normal ADF test, using SC to choose lag length and, as expected, I failed to reject Null.
  3. I used Bai-perron test (L + 1 VS. L) to sequentially determine intercept-breaking dates on the same ADF equation as step 2, giving me two breaking points.
  4. I constructed two dummies based on the estimated dates.
  5. I included these two dummies into the ADF equation in step 2 and estimated it again, rejecting the null. I then conclude no unit roots.

Two main reasons or specific questions lead me to concern:

  1. What should be the input test equation for Bai-perroon sequential test? Should I put a parsimonious AR(1) or the AR(p) model EViews estimated, given there are structural breaks.
  2. I do have a basic understanding that, for a single break series, the Perron test nests hypotheses into one equation and tests a null hypothesis of random walk with a break against a stationary series with a break, and it also includes a pulse dummy into the equation. So, in my step 5, should I also include two pulse dummies into the ADF equation given that I have two breaks estimated? Or I just use the two dummies as controls in the ADF test ........I think this may be a dumb question....but I am really struggling.

If you have a better way to test the unit root of a series with multiple breaks, please advise!!

(no trend in the series)

Thank you!!


Your Answer

By clicking "Post Your Answer", you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.