Break Point Estimation and Spurious Rejections With Endogenous Unit Root Tests

Abstract

This paper examines the accuracy of break point estimation using the endogenous break unit root tests of Zivot and Andrews (1992) and Perron (1997). We find that these tests tend to identify the break point incorrectly at one‐period behind ( T B ‐1) the true break point ( T B ), where bias in estimating the persistence parameter and spurious rejections are the greatest. In addition, this outcome occurs under the null and alternative hypotheses, and more so as the magnitude of the break increases. Consequences of utilizing these endogenous break tests are similar to (incorrectly) omitting the break term B t in Perron's (1989) exogenous test.