Explosive behaviour and long memory with an application to European bond yield spreads

Research output: Journal contributionsJournal articlesResearchpeer-review


This article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al. (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size‐controlled test with increased power. As a complement, we consider the Lagrange Multiplier test against long memory by Tanaka (1999). We study European government bond yield spreads during the financial crisis.
Original languageEnglish
JournalScottish Journal of Political Economy
Issue number1
Pages (from-to)139-153
Number of pages15
Publication statusPublished - 01.02.2019
Externally publishedYes