Normal tests for unit roots based on instrumental variable estimators

Abstract

For estimating unit roots of autoregressive processes, we introduce a new instrumental variable (IV) method which discounts large values of regressors corresponding to the unit roots. Based on the IV estimator, we propose new unit root tests whose limiting null distributions are standard normal. Observation at time t is adjusted for mean recursively by the sample mean of observations up to the time t. The powers of the proposed tests are better than those of the Dickey-Fuller tests and are comparable to those of the tests based on the weighted symmetric estimator, which are known to have the best power against stationary alternatives.