TY - JOUR

T1 - Explosive behaviour and long memory with an application to European bond yield spreads

AU - Wegener, Christoph

AU - Kruse, Robinson

PY - 2019/2/1

Y1 - 2019/2/1

N2 - 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.

AB - 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.

KW - Economics

UR - http://www.scopus.com/inward/record.url?scp=85047396598&partnerID=8YFLogxK

U2 - 10.1111/sjpe.12179

DO - 10.1111/sjpe.12179

M3 - Journal articles

VL - 66

SP - 139

EP - 153

JO - Scottish Journal of Political Economy

JF - Scottish Journal of Political Economy

SN - 0036-9292

IS - 1

ER -