Abstract
Whenever deterministic seasonality is ignored, the distribution of the Dickey-Fuller test is shifted to the left, with lower dispersion at the same time. When accounting for serial correlation, the distortions become less predictable. A Monte Carlo study confirms that the (augmented) Dickey-Fuller test without seasonal dummies is oversized and has little power at the same time, due to the need of lag augmentation. The effect of neglecting seasonal deterministics on the KPSS test for stationarity depends on the way the long-run variance is estimated.
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This is a shorter version of a working paper containing additional experimental evidence and the proofs of the propositions. The working paper is available online under http://www.wiwi.uni-frankfurt.de/~deme/ends_urt.pdf.
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Demetrescu, M., Hassler, U. Effect of neglected deterministic seasonality on unit root tests. Statistical Papers 48, 385–402 (2007). https://doi.org/10.1007/s00362-006-0343-6
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DOI: https://doi.org/10.1007/s00362-006-0343-6