Joint hypothesis specification for unit root tests with a structural break

Abstract

[eng] Several tests based on a t‐ratio have been proposed in the literature to decide the order of integration of a time series allowing for a structural break. However, another approach based on testing a joint hypothesis of unit root and the irrelevance of some nuisance parameters is also feasible. This paper proposes new unit root tests consistent with the presence of a structural break applying this second perspective. Our approach deals both with the case where the break is not allowed under the null hypothesis, and where it is allowed. Simulations investigate the performance of this proposal compared to the existing tests and show important gains in terms of power.