Size and power properties of structural break unit root tests

Abstract

In this article, we compare the small sample size and power properties of a newly developed endogenous structural break unit root test of Narayan and Popp (NP, 2010 Narayan, PK and Popp, S (NP). 2010. A new unit root test with two structural breaks in level and slope at unknown time. Journal of Applied Statistics, 37: 1425–38. [Taylor & Francis Online], [Web of Science ®] , [Google Scholar]) with the existing two break unit root tests, namely the Lumsdaine and Papell (LP, 1997 Lumsdaine, R and Papell, D (LP). 1997. Multiple trend break and the unit root hypothesis. Review of Economics and Statistics, 79: 212–18. [Crossref], [Web of Science ®] , [Google Scholar]) and the Lee and Strazicich (LS, 2003 Lee, J and Strazicich, M (LS). 2003. Minimum Lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, 85: 1082–9. [Crossref], [Web of Science ®] , [Google Scholar]) tests. In contrast to the widely used LP and LS tests, the NP test chooses the break date by maximizing the significance of the break dummy coefficient. Using Monte Carlo simulations, we show that the NP test has better size and high power, and identifies the structural breaks accurately. Power and size comparisons of the NP test with the LP and LS tests reveal that the NP test is significantly superior.