JOUFtNALOF

Econometrics
Journal of Econometrics 69 (1995) 5-25

Tests for seasonal unit roots

General to specific or specific to general?
Svend Hylleberg
Institute of Economics, University of Aarhus, 8000 Arhus C, Denmark

Abstract

In this paper the small sample properties of tests for seasonal unit roots in quarterly
time series are evaluated and compared. The basic difference between the two tests is that
the test proposed by Hylleberg, Engle, Granger, and Yoo (1990), the HEGY test, adopts
the general to specific strategy and tests the null of a unit root, while the test proposed by
Canova and Hansen (1993), the CH test, adopts the specific to general principle and tests
the null of a stationary process around a deterministic seasonal pattern. The main result
of the Monte Carlo experiments is that the two tests complement each other.

Key words: Deterministic and stochastic seasonality; Seasonal integration

JEL classijcation: C22; C32

1. Introduction

The seasonal characteristics of macro economic time series have recently

become the object of several studies; see Beaulieu and Miron (1992, 1993),

This is a revised version of a paper presented at the conference on Bayesian and Classical
Econometric Modelling of Time Series in Marseille, June 20-21, 1992. Earlier versions have also
been presented at seminars at Sandbjerg, the European University Institute in Florence, Aarhus
University, Stanford University, and at ESEM93 in Uppsala. Comments from two anonymous
referees, Ssren Johansen, Grayham Mizon, Fabio Canova, Robert Engle, Bruce Hansen, Steven
Durlauf, Robert Hall, and Adrian Pagan are gratefully acknowledged, and I thank Kirsten Stentoft
for typing the manuscript and the Danish Social Science Research Council and the Research
Foundation of the University of Aarhus for financial support. Part of the work was made while the
author was visiting the Department of Economics, University of California at San Diego, and the
Research School of the Social Sciences, Australian National University, Canberra, which both
provided excellent research environments. The computations were made using Gauss 2.1.

0304-4076/95/$09.50 0 1995 Elsevier Science S.A. All rights reserved

SSDI 030440769401660 R
6 S. Hylleberg /Journal of Econometrics 69 (1995) 5-25

Miron (1993), Franses (1991), Ghysels (1993), Osborn (1990), Hylleberg (1992),
Hylleberg, Jorgensen, and Sorensen (1993), and Canova and Hansen (1993).
In most studies the technique for evaluating the changing nature of the
seasonal components has been the so-called HEGY tests developed by
Hylleberg, Engle, Granger, and Yoo (1990) and Engle, Granger, Hylleberg, and
Lee (1993). These tests for seasonal unit roots are based on the same idea as the
well-known Dickey-Fuller tests for a unit root at the long-run frequency; see
Dickey and Fuller (1979) and Fuller (1976). Like the Dickey-Fuller test, the
HEGY test is quite easy to compute from an auxiliary ordinary least squares
regression. The most important reservation against the test has been that the
null hypothesis of a unit root at the seasonal frequencies is problematic because
a seasonal unit root allows for more variation in the seasonal pattern than is
actually observed. So, if the Data Generating Process (DGP) is a process with
seasonal unit roots, ‘winter may become summer’. This criticism is not valid,
however, as these univariate models should be treated as approximations
anyway, and as a unit root process with an initially strong deterministic pattern
may be very stable for a long period.
Another criticism is that the HEGY test, like the Dickey-Fuller test, has low
power’ against reasonable alternatives and that the existence of moving average
terms with roots close to the unit circle imply that the power is almost equal to
the size. However, as is shown below, the power of the test is actually quite high
when a proper augmentation of the auxiliary regression with lagged dependent
variables is applied. Nonetheless, it is of course very useful to construct tests
with better properties than the existing ones either against similar or different
alternatives or for different sustained assumptions. This is the objective of
Canova and Hansen (1993), who extend the test of Kwiatkowski, Phillips,
Schmidt, and Shin (1992) to the seasonal case and propose a test, the CH test,
based on the residuals from a regression extracting the deterministic seasonal
components and other deterministic components.
The HEGY procedure starts by specifying a general autoregressive model
parameterized so as to bring out the seasonal and long-run unit roots. The
autoregression is chosen in order to obtain the most parsimonious model that
renders the errors white noise. The argument behind such a procedure is of
course well-known from the discussion of the general to specific testing proce-
dure.
The idea behind the CH test is the specific to general principle. Canova and
Hansen consider the residuals from a simple regression where the regressand is

’ In Ghysels, Lee, and Noh (1991) the small sample properties of the HEGY test is evaluated and
compared to the test suggested in Dickey, Hasza, and Fuller (1984), and the results are quite
favourable for the HEGY test. Ghysels, Lee, and Noh also extend the HEGY test by a joint test of all
the seasonal unit roots.
 S. Hylleberg /Journal of Econometrics 69 (1995) 5-25 7

the observed variable or its first difference in cases where the series is believed to
be I(1) at the zero frequency, and the regressors are the deterministic compo-
nents in the model specified under the null. The residuals from this regression
are then tested for stochastic components such as a unit root process at the
semiannual frequency or a unit root at the annual frequency. A test of the
combined hypothesis is suggested as the obvious extension of this procedure.
The left-out dynamics are taken care of by using a consistent estimator of the
variance of the specific stochastic seasonal component. This procedure, which is
similar in spirit to the one adopted in the Phillips z test (see Phillips, 1987), for
a zero frequency unit root, applies a kernel estimate of the variance.
However, even if this procedure may take care of both stationary autocorrela-
tion and heteroskedasticity, it is not well suited to handle nonstationary dynamics
in the residuals. From the discussion of I(2) variables at the zero frequency we
know that the existence of extra unit roots can be disastrous for the properties of
the unit root tests; see Dickey and Pantula (1987) and Haldrup (1993). The reason
for this is the existence of nonstationary stochastic components in the residuals.
As the existence of unit roots at other frequencies also implies nonstationary
stochastic components in the residuals, it is likely that a test for a unit root at
a particular frequency is seriously affected by the existence of other ‘unattended
unit roots, which exist either at the same frequency or at other frequencies. In the
HEGY test and in the Dickey-Fuller test the right augmentation of the auxiliary
regression with lagged fourth or first differences may take care of the latter problem.
Even if the CH test has no direct way to model a ‘nuisance’ unit root, it is
feasible, however, to presuppose one or more of the possible unit roots and then
test for the existence of a unit root at another frequency. Actually a zero
frequency unit root is presupposed in their practical applications and in the
Monte Carlo simulations reported in Canova and Hansen.
Canova and Hansen (1993) also suggest to add one lag of the regressand to
the auxiliary regression. Two lags or more is not recommended because this
‘may absorb at least one of the seasonal unit roots under the alternative
hypothesis’ (Canova and Hansen, 1993, pp. 18-19). However, the application of
one lag will in fact have a similar effect on the semiannual unit root. Consider
the case y, = S,, where S, = -S,_ 1 + qt. qt - nid(O, l), which for quarterly data
is a seasonal process with a unit root at the semiannual frequency.’ The
residuals would then be an estimate of -(l + a)& 1 + ylt, where c( is the
regression coefficient from a regression of y, on y,_ 1. If the least squares estimate
of OL= - 1 were unbiased, no seasonality and certainly not a semiannual unit
root could be expected in the residuals. Hence a test such as the CH test against
a unit root at the semiannual frequency would be powerless. However, the least

‘This model is a simplified version of the model applied by Canova and Hansen (1993), but the
argument goes through to more general models.
8 S. Hylleberg 1 Journal of Econometrics 69 (1995) 5-25

squares estimate of u = - 1 is biased towards zero, and hence the residuals may
contain a fraction of the original unit root component only. In large samples this
down-scaling may be less harmful, but for any finite sample the CH test of the
null of no unit root at the semiannual frequency against a unit root would have
less power. In addition it seems odd to construct a test which relies on the biases
of the estimates. In short it is not a feasible way to add a lag of the dependent
variable to the auxiliary regression in the CH framework.
We will present the two tests in Section 2 and the results of Monte Carlo
experiments investigating and computing the small sample properties of the
tests in Section 3. Section 4 gives a summary of the results.

2. Two tests for seasonal unit roots

In Hylleberg, Engle, Granger, and Yoo (1990) an integrated series of order d at

frequency 8 is defined as a series xI with a spectrum of the form
f(o) = c(0 - e)-zd, (1)
for o near 8. This is written as x, - IO(d).
Hence, a process generated by
(1 - B4)x, = E, - iid(O, cr’), (2)
where B is the lag operator, is integrated of order 1 at the frequencies 0, d(t), and
4 of a cycle as (1 - B)4 can be written as (1 - B4) = (1 - B)(l + B)(l + B2) =
(1 - B)(l + B)(i - B)(-i - B) indicating the roots 1, - 1, i, -i corresponding
to the frequencies O,$, $, and 2, respectively. The application of the fourth
difference to render quarterly seasonal data stationary is one of the transforma-
tions advocated by Box and Jenkins (1970).
As l/(1 - B4) = $[l/(l - B) + l/(1 + B) + 2/(1 + B2)], the particular solu-
tion to the stochastic difference equation in (2) can be found as
Xpr= E,/(l - B4) = $(s,, + s21+ 2s,,),
where the nonstationary stochastic trend sl, and the nonstationary stochastic
seasonals s21 and sJt are defined as
t-1
Sit = Et/(1 - B) = C Et-j,

j=O
t-1
S2t = &f/(1 + B) = C (- l)j&,-j, (3)
j=O
int[(t-1)/21
S3t = &t/(1 + B2) = C (-l)j&2j,
j=O
provided the initial values are all zero.
 S. Hylleberg 1 Journal of Econometrics 69 (1995) 5-25 9

Notice that while the means of these components are all zero, the variances
are

V(s,,) = V&J = ta2, V(s,,)=(int[T]+l)c7’,

while the covariance is COV(sj,,sit) = 0, i,j = 1,2,3, i #j, for T divisible by 4,

and <a2 otherwise.
This implies that the 0 frequency, the f frequency, and the $ frequency
components are uncorrelated if the sample size is an integer number of years.
The homogeneous solution to (2) is x h*= Cl (1)’ + c2( - 1)’ + Cg(# + cq( -i)‘,
where c3 and c4 are complex conjugates in order for xt to be real, and where cjr
j = 1,2,3,4, can be found from the initial conditions. Thus, the solution to the
difference equation in (2) is xP, + xht, and it is seen that, although the stochastic
components (i.e., the s,‘S) may produce a too varying seasonal pattern, the
deterministic pattern in xht determined by the initial values (i.e., the values of
cl, c2, c3, and c4) may keep the seasonal variation from being too volatile for
a reasonable sample size.
The tests for seasonal unit roots developed by Hylleberg, Engle, Granger, and
Yoo (1990) - see also Engle, Granger, Hylleberg, and Lee (1993) - are based on
the autoregressive model

W)x, = et, (4)

where E, - iid(O, 02) while b(B) is a lag polynomial which is assumed to be
finite-valued at the distinct, nonzero possible complex points, 8i, 02, . . . ,13,.
In Hylleberg et al. (1990) it is shown that it is always possible to write (4) as

d*@)y,t = nlYlt- 1 + 712Y2t- 1 + n3y3r-2 + n4y31- 1 + %, (5)

where
yl, = (1 + B)(l + B2)x, = (1 + B + B2 + B3)x,,
y2, = -(l - B)(l + B2)x, = -(l -B -t B2 - B3)x,,

y3( = -(l - B)(l + B)x, = -(l - B2)x,,

~4t = (1 -B4h

while 4*(B) = 1 - CT_I 4rBj is a stationary polynomial in the lag operator

B provided the only possible unit roots are a frequency 0 or long-run unit root
(B = l), a semiannual unit root (frequency 4) corresponding to B = - 1, and an
annual unit root (frequency $ and 2) corresponding to B = + i.
Notice that in ylt we have removed the seasonal unit roots at frequencies $
and 3 and preserved the zero frequency unit root, while yzt and y3t contain the
f and a (2) frequency unit roots, respectively, but not the unit roots at other
frequencies.
10 S. Hylleberg /Journal of Econometrics 69 (1995) 5-25

The long-run or zero frequency unit root can be tested against the stationary
alternative rcl < 0 by use of the ‘t’ value on rcl. 3 This t value is distributed as the
usual Dickey-Fuller t, and the tables supplied by Fuller (1976) can be used.
Similarly, a test for a semiannual unit root, i.e., a unit root at the frequency 9, is
based on the ‘t’ value on rr2, and again we can use the tables in Fuller (1976) as
the distribution is the usual Dickey-Fuller distribution.4
The test for an annual unit root, i.e., a unit root at the frequency $ and the
complex conjugate $ of a cycle, is slightly more complicated. In case 7r4- 0,
a unit root exists at the frequency $ if 7c3= 0 and a test of this hypothesis is based
on the t value on 7r3which has a distribution like the one developed by Dickey,
Hasza, and Fuller (1984) for a process x, = px,_ 2 + a,.’
However, if 7t4is not identically zero, a test of H,: 7r3= 0, 7r4= 0 based on the
F value corresponding to 7t3and x4 is suggested.6 Simulated critical values are
supplied by Hylleberg et al. (1990) as is the critical values for the t value on rr4. In
Engle, Granger, Hylleberg, and Lee (1993) it is shown that the distribution of the
‘F’ statistics corresponds to the distribution of (& + t&)“2.
As in the case of the Dickey-Fuller test the right augmentation in the
parameterization of 4*(B) is crucial for the properties of the test. By the right
augmentation we mean the most parsimonious augmentation necessary to
render the errors white noise. This implies that a careful modelling must take
place, and all criteria for the white noise property of the errors must be met.
Especially autocorrelation destroys the properties of the test. This often implies
that although a lag length of k is imperative, lag k - 1 is not. In a present paper
by Ghysels, Lee, and Siklos (1993) the data-dependent lag order selection is
discussed and some of the effects on the distribution of the test statistics are
presented.
While the power of the test is low if too many lag coefficients are used, the size
is much higher than the nominal level of significance if too few are used. These
small sample properties will be documented below by Mpnte Carlo experiments.
The auxiliary regression may also be extended by deterministic regressors like
an intercept, seasonal dummies, and a trend in order to obtain power against
relevant alternatives, but the distributions change. Appropriate critical values
can be found in Hylleberg et al. (1990).
The tests suggested by Canova and Hansen (1993) are based on the observa-
tion that in a regression with seasonal dummies and other deterministic and
nonstochastic factors as regressors a unit root must show up in the residuals if it
exists at all. In particular a unit root at a given frequency may affect the

3The null hypothesis is Ho: 1~~= 0, while the stationary alternative is H,: sl < 0.
4H,,: n2 = 0, H,: nz < 0.
5H0:rr,=0,H,:n3<0.
6H0: K~An,=O,H,:n,uli,#O.
 S. Hylleberg / Journal of Econometrics 69 (1995) S-25 11

covariance of the residuals in a specific way and basically the CH test exploits
the form of the covariance matrix which is known under the hypothesis of
a seasonal unit root at a given frequency.
Consider the regression

y=Gcr+Xj?+e, (6)
where y is a T x 1 vector, G a T x A, vector of seasonal dummies and/or trends,
and X a T x .4, matrix of other fixed nonstochastic regressors which may be in
the model. The T x 1 disturbance vector e is assumed to take the form
e = u + rC,[ where u N N(0, a:Z), [ N N(O,Z), while C, is a T x T matrix of
known constants and r a scalar. The matrix C, maps the process [ into
a seasonal process with a unit root at frequency 0, I3= 0, b, f. A precise
description of the different C, mappings is given below. If z = 0, e = u and we
have the usual Ordinary Least Squares case. But in case z # 0,
e N N(0, a:Z + z’C,C~), and the Generalized Least Squares estimator is then
found by minimizing
(y - Ga - X&‘(gzZ + zzC,C~)-‘(y - Ga -X/l),
while the test of the null H,: z = 0, or rather 22 = 0, is developed from the
derivative with respect to z2 under the null. The test statistic is shown to be
proportional to

i?c,c;f?= i s:(e), (7)

i=l
where S,(0) is the tth row of C&? and e*the (OLS) residuals under the null.
The test statistics suggested by Canova and Hansen (1993) take the form

L* = [1/T2c?] i s:(8), (8)

t=1

where 19= 0,*,aand s2 is an estimate of the long-run variance of e,. A consis-

tent estimate of the long-run variance is found as

(9)

The applied kernel k( .) can be the Bartlett, Parzen, or Quadratic Spectral

kernel, but here we follow the recommendation of Andrews (1991) and apply the
Quadratic Spectral kernel with the bandwidth, q, chosen by the Automatic
Bandwidth Selection method described by him. Obviously, both the kernel
applied and the chosen bandwidth may be important for the properties of the
test.
Hence, to obtain a test against a unit root at a specific frequency the
appropriate choice of C must be made. However, it is intuitively obvious that
12 S. Hylleberg /Journal of Econometrics 69 (1995) S-25

S, is a function of either sl,, szI, or sJr or of a combination of the processes

defined in (3). It is in fact easy to prove that if a test against a seasonal unit root
at frequency 3 is the object, C must be chosen so that S, has the form of
s2, defined in (3), while if a test against a unit root at frequency a (and 2) is the
object, C is chosen so that S, has the form of sJt defined in (3), but in both cases
with E, replaced by the first step residuals. A joint test against a unit root at both
frequencies is just the sum of the two tests. Obviously, a test against a zero
frequency unit root is obtained if C is chosen so that S, has the form of sit.
The null hypothesis of no unit root at frequency 0 is rejected if LB is above the
asymptotic critical values supplied by Canova and Hansen. The distribution is
nonstandard but depends only on the number of roots being tested. A complex
conjugate set counts for two.
In the case of a test for a seasonal unit root at the annual frequency
($ of a cycle) Canova and Hansen allow for a nondiagonal long-run covari-
ante matrix, thereby allowing for seasonal heteroskedasticity between the two
complex conjugate components. In the Monte Carlo experiments conducted here
we used the simpler version and generated data without seasonal heteroskedasticity.

3. Monte Carlo experiments

In order to compare the small properties of the two tests a series of Monte
Carlo experiments were conducted, with the number of replications set to
N = 1000, the sample size T = 48, 100,136,200, and the random numbers, i.e.,
E,, generated by the GAUSS program RNDN.
As the null hypothesis of the HEGY test and the CH tests are different, as the
assumed DGPs are somewhat different, and as Monte Carlo experiments must
have clearly defined objectives to become useful, we confined ourselves to
answer the following questions:

(A) How sensitive are the HEGY and CH tests to the choice of DGP?

The DGP’s considered are an autoregressive model as assumed by Hylleberg

et al. (1990) and an unobserved components model as assumed by Canova and
Hansen (1993).
The DGP of the HEGY setup is an autoregression of the form

g(W(Wx, = m, + c(Ws,, E, N nid(O, l), (10)

where a(B) and c(B) are stationary polynomials in the lag operator, c is a scalar
determining the standard deviation of the error processes, while m, is a vector of
deterministic elements such as an intercept, seasonal dummies, and a trend. In
the following both the HEGY and the CH DGP always include the determinis-
tic component m, = 10.0 - 4.0 Qit + 4.0 Qzt - 4.0 Qarr where Qir, i = 1,2,3, are
 S. Hylleberg / Journal of Econometrics 69 (1995) 5-25 13

seasonal dummies.’ However, removing m, from the DGP in a set of experi-

ments had no effects on the results, as the auxiliary regression for both the
HEGY test and the CH test includes an intercept and three seasonal dummies.
For the HEGY DGP the deterministic parts are switched off at the beginning of
the sample period. This implies that they have effect on the initial values only. In
cases where seasonal deterministic dummies are included throughout the sample
period, a unit root will generate an increasing seasonal pattern. The lag poly-
nomial g(B) contained the unit roots of the DGP, and it was defined as
g(B) = (1 - &WI + 0-W + cg3 - g,ilW1 - h + g,ilW
(11)
= (1 - g1Wl + Sdw + 294 + cd + dW)~
where g1 = 1.0 gives a zero frequency unit root, g2 = 1.0 gives a semiannual unit
root, and g3 = 1.0 and g4 = 0.0 give an annual unit root.
The DGP of the CH setup is an unobserved components model of the form
a(B)x, = m, + c(B)a(s, + rS,),
(12)
g(B)S, = i, N nid(0, l), E, N nid(O, 1).
Unless otherwise stated the auxiliary regression for the HEGY test is as in (5),
extended with a constant term, seasonal dummies, and a trend, but with no
augmentationp = 0, i.e., q*(B) = 1. The CH auxiliary first step regression is the
first difference of the observations on a constant and three seasonal dummies,
i.e., no lagged first difference is included as (wrongly) advocated by Canova and
Hansen (1993).
The results shown in Tables 1 and 2’ indicate that the HEGY test performs
better than the CH test in the case of a DGP such as (10) when T is small, as the
CH test in this case wrongly rejects a unit root too often compared to the
nominal size of 5% when there exists a unit root at other seasonal frequencies.
However, the performance of the CH test improves with T. In the case of a DGP
of the CH type such as (12), the CH test is preferable in general, but for small
sample sizes (T = 48) it is not, see below.

(B) In case of (12) i.e., the unobserved components model of Canova and Hansen:
how sensitive are the tests to the choice of z?

As r2 is the relative variance of the seasonal component in the unobserved

components model, a low value of r implies a very constant pattern or almost no
seasonal pattern at all, if the deterministic part is absent.

’ The parameters for the deterministic components were specified as in Canova and Hansen (1993).
s For the sake of comparison the results of the test are presented as rejection of a unit root. For the
HEGY test this corresponds to a rejection of the null of a unit root, while for the CH test it
corresponds to acceptance of the null of no unit root.
Table 1
Rejection frequencies for the HEGY (boldface figures) and CH tests (italic figures) of seasonal unit roots for different DGP’s with a unit root at the annual
seasonal frequency

HEGY DGP CH DGP CH DGP z

6
(1 - B)x, = m, + E, + 0.2.9, (1 - B)x, = m, + E, + s, o;r
.
(1 - B)(l + g,B)(l + B*)x, = m, + E, (1 + g,B)(l + B2P, - 5, (1 + gzB)U + B’P, - L
E, - nid(O, 1)
6
s,, & - nid(0, 1) E,, L - nid(0, 1)
Changing 5
e
parameter T T T
92 48 100 136 200 48 100 136 200 48 100 136 200 2
8
$
Semiannual unit root test

1.0 0.03 0.04 0.04 0.04 0.43 0.84 0.90 0.92 0.05 0.09 0.10 0.10 i.
0.19 0.10 0.06 0.03 0.42 0.16 0.11 0.05 0.13 0.04 0.03 0.01
%
0.95 0.04 0.10 0.14 0.26 0.50 0.98 1.0 1.0 0.07 0.23 0.54 0.54 --2
0.34 0.26 0.27 0.28 0.61 0.44 0.39 0.37 0.22 0.16 0.14 0.18 s
*
0.90 0.05 0.24 0.44 0.81 0.55 1.0 1.0 1.0 0.11 0.47 0.95 0.95 ‘;
0.46 0.51 0.57 0.62 0.70 0.68 0.68 0.70 0.35 0.34 0.37 0.42 2

0.80 0.15 0.79 0.97 1.0 0.56 1.0 1.0 1.0 0.25 0.93 1.0 1.0
0.73 0.85 0.91 0.95 0.84 0.88 0.90 0.91 0.58 0.71 0.80 0.84

0.65 0.48 1.0 1.0 1.0 0.62 1.0 1.0 1.0 0.53 1.0 1.0 1.0
0.92 0.98 0.99 I.0 0.90 0.95 0.96 0.97 0.84 0.95 0.96 0.98

0.50 0.81 1.0 1.0 1.0 0.56 1.0 1.0 1.0 0.76 1.0 1.0 1.0
0.98 I.0 I.0 I.0 0.92 0.96 0.97 0.99 0.95 0.99 I.0 I.0
Annual unit root test
1.0 0.05 0.03 0.06 0.04 0.86 1.0 1.0 1.0 0.27 0.39 0.43 0.43
0.32 0.14 0.10 0.05 0.88 0.57 0.36 0.21 0.46 0.25 0.20 0.11
0.95 0.05 0.05 0.05 0.05 0.86 0.99 1.0 1.0 0.27 0.37 0.36 0.40
0.26 0.09 0.04 0.01 0.86 0.48 0.34 0.17 0.42 0.15 0.09 0.04
0.90 0.05 0.05 0.05 0.05 0.86 0.99 1.0 1.0 0.27 0.34 0.35 0.39
0.20 0.07 0.04 0.01 0.86 0.48 0.30 0.14 0.31 O.IO 0.06 0.02
0.80 0.04 0.05 0.05 0.05 0.83 0.99 1.0 1.0 0.24 0.27 0.31 0.33
0.19 0.06 0.04 o.OI 0.83 0.43 0.34 0.13 0.30 0.09 0.04 0.03
0.65 0.06 0.04 0.05 0.06 0.84 0.99 1.0 1.0 0.19 0.33 0.27 0.26
0.17 0.06 0.04 0.01 0.80 0.41 0.24 0.13 0.25 0.06 0.03 0.02
0.50 0.06 0.05 0.04 0.05 0.77 0.98 0.99 1.0 0.19 0.22 0.22 0.21
0.18 0.06 0.04 0.01 0.75 0.38 0.23 0.10 0.23 0.08 0.04 0.02
Table 2
Rejection frequencies for the HEGY (boldface figures) and CH tests (italic figures) of seasonal unit roots for different DGP’s with a unit root at the
semiannual frequency

HEGY DGP CH DGP CH DGP

(I - B)x, = m, + E, + 0.2S, (1 - B)x, = m, + E, + S,

(1 - B)(l + B)(l + g:B’)x, = m, + E, (1 + B)(l + sW)S, w r, (1 + B)(l + sW)S, N 5,
E, u nid(O, 1) or, 5, _ nid(0, 1) e,, 5, w nid(0, 1)
Changing
parameter T T T
Q3 48 100 136 200 48 100 136 200 48 100 136 200

Semiannual unit root test

1.0 0.02 0.04 0.04 0.04 0.40 0.82 O&4 0.B 0.05 0.0s 0.08 0.10
0.19 0.07 0.07 0.04 0.42 0.18 0.09 0.05 0.14 0.04 0.03 0.01

0.975 0.02 0.04 0.03 0.04 0.41 0.71 0.78 0.86 0.05 0.10 0.10 0.09
O.IS 0.03 0.02 0.00 0.38 0.14 0.08 0.03 0.11 0.03 0.01 0.00

0.95 0.04 0.04 0.03 0.05 0.36 0.66 0.76 oa2 0.05 0.0s 0.07 0.11
0.14 0.03 0.01 0.00 0.41 0.15 0.07 0.03 0.09 0.01 0.00 0.00

0.90 0.03 0.03 0.04 0.03 0.34 0.64 0.71 0.75 0.04 0.06 0.07 0.09
0.73 0.85 0.91 0.95 0.84 0.88 0.90 0.91 0.58 0.71 0.80 0.84

0.80 0.02 0.03 0.04 0.04 0.28 0.57 0.62 0.68 0.03 0.06 0.0s 0.07
0.05 0.00 0.00 0.00 0.31 0.08 0.05 0.01 0.04 0.01 0.00 0.00

0.70 0.02 0.04 0.05 0.04 0.26 0.49 0.52 0.58 0.04 0.06 0.06 0.07
0.03 0.00 0.00 0.00 0.28 0.03 0.01 0.04 0.00 0.00 1.0 0.00
Annual unit root test
1.0 0.06 0.05 0.06 0.05 0.99 1.0 1.0 1.0 0.27 0.37 0.38 0.42
0.34 0.13 0.10 0.05 0.89 0.53 0.40 0.23 0.48 0.26 0. I 7 0.11
0.915 0.06 0.08 0.11 0.19 0.99 1.0 1.0 1.0 0.40 0.64 0.79 0.92
0.49 0.36 0.31 0.28 0.95 0.84 0.80 0.69 0.66 0.54 0.49 0.48

0.95 0.90 0.19 0.29 0.53 1.0 1.0 1.0 1.0 0.47 0.84 0.95 1.0
0.71 0.53 0.51 0.51 0.96 0.94 0.90 0.90 0.79 0.72 0.70 0.72
0.90 0.16 0.54 0.80 0.99 1.0 1.0 1.0 1.0 0.62 0.99 1.0 1.0
0.75 0.76 0.81 0.85 I.0 0.98 0.99 0.99 0.90 0.90 0.91 0.96
0.80 0.45 0.97 1.0 1.0 1.0 1.0 1.0 1.0 0.86 1.0 1.0 1.0
0.93 0.97 0.98 0.99 1.0 I.0 I.0 I.0 0.98 0.99 I.0 1.0
0.70 0.77 1.0 1.0 1.0 1.0 1.0 1.0 1.0 O.% 1.0 1.0 1.0
0.99 1.0 1.0 1.0 1.0 I.0 I.0 I.0 0.99 I.0 I.0 I.0
18 S. Hylleberg / Journal of Econometrics 69 (1995) 5-25

From the results presented in Tables 1 and 2 we find that both tests have
difficulties with a value of z = 0.2. This is especially true for the HEGY test,
while the CH test is doing better if T is large. These difficulties are not surprising
though. When processes like (12) with z = 0.20 are analyzed more closely, it
becomes obvious that the stochastic unit root seasonality constitutes only
a minor part of the total seasonal variation, and that the process in (12) is almost
indistinguishable from a pure deterministic seasonal process. This is illustrated
in Fig. 1, where series representing the four quarters of simulated processes with
r = 0,0.2, 1.0,3.0 are shown. From Fig. 1 it is obvious that the seasonal pattern
for z = 0.2 is very constant and undistinguishable from the constant seasonal
pattern of the case z = 0, while the process with r = 3.0 indicates a clearly
changing seasonal pattern. The case of t = 1.0 gives a very stable seasonal
pattern as well, but with some changes. However, even for z = 0.2, the CH test
improves its performance quite substantially when the number of observations
increases, but such a development is not found for the HEGY test.
When z = 1.0 the performance of both the HEGY and the CH test is
improved, but the HEGY test is still doing quite badly in the test for the annual

Tou - 0.0 Tou = 0.2

:::e
a.
I. d--~~~,_...__,..___.--.__-_____-__
5 _I w--l-‘, ,_/*,*-.--_-
-8.
-12.

:::.v. ,
0 4 8 12 16 20 24 20 0 4 I 12 16 20 24 28
YEARS YEARS

Tou = 1.0 Tou = 3.0

30,
,’
20. *"X/1
I--
_I

-SQL.-- . . . .-.., I

0 4 8 12 16 20 24 26 0 4 8 12 16 20 24 28
YEARS YEARS

Fig. 1. The four quarters less the yearly average; quarterly data over 25 years. DGP: (1 - B)x, =
m, + s, + 6, (1 + B)(l + B*)S, = C,, E,, i, 5 nid(O, l), and T = 0, 0.2, 1.0, 3.0.
 S. Hylleberg /Journal of Econometrics 69 (1995) 5-25 19

unit root, while the two tests in case of a semiannual unit root have similar
properties. The HEGY test for the annual unit root has a size of between 0.19
and 0.43 with a nominal significance level of 0.05. The CH test does as badly as
the HEGY test in case of an annual unit root or even worse in case of a small T,
but the frequency of wrong rejections of a unit root decreases when T increases.

(C) What are the eficts on the power and size of the HEGY tests of the choice of
augmentation in the auxiliary regression?

In the introduction it was argued that the power of HEGY test decreases if the
number of lag coefficients is above the parsimonious number necessary to
render the errors white noise, while the size is much bigger than the level of
significance if too few lag coefficients are applied.
In Tables 3 and 4 it is documented that the size is much larger than the
nominal significance level if the augmentation lag is too short and the power
very low if the augmentation lag is too long. In a model where the correct
augmentation is 2 lags, the size distortion even increases with the number of
observations when no augmentation, i.e., p = 0, is applied, while the power (see
Table 3) is extremely low and equal to the size if p is set equal to 5 and T is low.
The power improves, however, with an increase in T. For p = 0 the results in
Table 4 indicate that the size distortion is much higher if there is a unit root in
the seasonal process in addition to the one being tested for.
These results are in line with those obtained by Ghysels, Lee, and Noh (1991)
for the case of an augmented Dickey-Fuller test applied to data with seasonal
unit roots, but the results also show that their recommendation of not being too
stingy about the lags but use at least enough lags may easily lead to overestimat-
ing the number of unit roots. However, to use too few lags will lead to rejection
of far too many unit roots. These results help to explain the very few seasonal
unit roots found by Beaulieu and Miron (1992,1993) as they used one lag only.’
The results of Canova and Hansen (1993) in the HEGY auxiliary indicating
a very low power for the HEGY test may also be questioned on these grounds as
they use two lags in the augmentation even if none were necessary.

(D) What is the effect of the HEGY and the CH tests of a moving average error term
in the DGP?

In case of a moving average error term the results of Schwert (1989) indicate
that tests based on an autoregressive representation such as the Dickey-Fuller
test and the HEGY test could be badly effected. In Table 5 the results of Monte

’ Hylleberg, Jorgensen, and Serenscn (1993) argue that the results of Beaulieu and Miron (1992,
1993) are indeed subject to such a criticism.
 20 S. Hylleberg 1 Journal of Econometrics 69 (1995) 5-25

Table 3
Size and power of the HEGY test for a semiannual unit root t,, for different augmentations of the HEGY auxiliary
regression

DGP: (1 - 0.88 - 0.1B2)(1 - B)(l + g,B)(l + B*)x, = m, + E,, E, _ nid(O, 1)

p=o p=2 p=5

Augmentation T T T
g2 48 100 136 200 48 100 136 200 48 100 136 200

1.0 0.30 0.60 0.69 0.78 0.02 0.03 0.03 0.03 0.01 0.03 0.03 0.03
0.95 0.48 0.94 0.99 1.0 0.03 0.09 0.11 0.19 0.02 0.05 0.09 0.19
0.90 0.61 1.0 1.0 1.0 0.04 0.18 0.39 0.72 0.02 0.11 0.23 0.58
0.80 0.86 1.0 1.0 1.0 0.11 0.62 0.90 1.0 0.03 0.33 0.63 0.95
0.65 0.98 1.0 1.0 1.0 0.22 0.97 1.0 1.0 0.05 0.61 0.92 1.0
0.5 1.0 1.0 1.0 1.0 0.40 1.0 1.0 1.0 0.07 0.80 0.97 1.0

Table 4
Size of the HEGY test for an annual unit root F,,,,, for different augmentations of the HEGY auxiliary
regression

DGP: (1 - 0.8B - O.lBs)(l - B)(l + g,B)(l + B’)x, = m, + E,, E, - nid(O, 1)

p=o p=2 p=5

Augmentation
T g2 = 1.0 gr = 0.5 gr = 1.0 g* = 0.5 g2 = 1.0 g2 = 0.5

48 0.55 0.19 0.05 0.04 0.05 0.03

100 0.84 0.31 0.04 0.05 0.04 0.05
136 0.91 0.34 0.05 0.05 0.04 0.03
200 0.95 0.36 0.04 0.06 0.04 0.05

Carlo experiments based on a DGP with a moving average error term are
presented.
When the error term is a first-order MA process and the DGP contains unit
roots at the zero and annual frequency, the HEGY test for a semiannual unit
root, t,,, almost never rejects if no augmentation is used (p = 0), but the
performance is improved considerably if an augmentation of p = 5 lags is
applied. The CH test L,,, always performs nearly as bad as the HEGY test,
when this test applies an augmentation of p = 0, while the CH test does much
worse than the HEGY test with p = 5 indicating that the CH estimate of the
variance cannot take care of an MA error process.
The size of the tests of an annual unit root is only slightly affected by a moving
average component of this form although the size of the test seems to increase
with the sample size. But when there are no seasonal unit roots at the annual
 S. Hylleberg J Journal of Econometrics 69 (1995) 5-25 21

Table 5
Rejection frequencies for the HEGY and CH test of seasonal unit roots in case of a moving average
error process

DGP: (1 - grB)(l + g$)(l + g$B’)x, = m, + c(B)s,, s, _ nid(0, 1)

HEGY test CH test

p=o p=5

Semi- Semi- Semi-

annual Annual annual Annual annual Annual
DGP T trz F wnll4 t12 F x,fi714 L 112 L l/4

c(B) = 1 + 0.8B 48 0.90 0.07 0.03 0.10 0.92 0.11

gr = g* = gs = 1 100 0.99 0.08 0.12 0.13 0.87 0.06
136 1.0 0.11 0.14 0.16 0.80 0.04
200 1.0 0.16 0.21 0.17 0.73 0.01

c(B) = 1 + 0.8B 48 0.28 1.0 0.03 0.22 0.36 0.53

g, = gz = 1, gs = 0 100 0.60 1.0 0.08 0.95 0.10 0.21
136 0.63 1.0 0.07 1.0 0.04 0.10
200 0.69 1.0 0.12 1.0 0.01 0.04

frequency, the HEGY test of the semiannual unit root falsely rejects in fewer
cases than when g3 = 1. However, while the HEGY test on the annual unit root
performs quite well, the CH test falsely accepts the existence of a unit root in
between (100 - 53)% = 47% and (100 - 4)% = 96% of the cases when g3 = 0,
also indicating that the CH test has difficulties with the existence of unit roots
at other frequencies.”
These results seem to be consistent with the findings of Schwert (1989). He
compared the Phillips-Perron test for a zero frequency unit root (see Phillips
and Perron, 1988) and the Dickey-Fuller test (see Dickey and Fuller, 1979;
Fuller, 1976). The results of Schwert indicate that the test based on the con-
sistent estimate of the variance, i.e., the first test, has more difficulties coping
with a moving average error process than the one based on may be a high-order
AR approximation, i.e., the latter test.

(E) What are the effects on the power and size of the CH test of the choice of
bandwidth and the choice of kernel?

From Andrews (1991) we know that both the choice of the kernel and the
bandwidth may have substantial influence on the results.

lo These results for the HEGY tests duplicate some of the results obtained by Ghysels, Lee, and Noh
(1991).
22 S. Hylleberg /Journal of Econometrics 69 (1995) 5-25

The results of Monte Carlo experiment using the CH DGP with g1 = 0.0,
al = 1.0, g2 = 1.0,0.95,0.90,0.80,0.65,0.50, g3 = g4 = 0.0, and z = 1.0, showed
no difference in the rejection frequencies between the three kernels, the Quad-
ratic Spectral, the Parzen, or the Bartlett kernels. Likewise, only very minor and
insignificant differences occurred in the results of experiments using the auto-
matic bandwidth and a manual bandwidth with bandwidth of 3,4,5, and 6 for
T = 48, 100, 136, and 200.

(F) What are the efsects on the rejection frequencies of the CH test of including
a lagged dependent variable in the auxiliary regression?

In the introduction it was shown that inclusion of a lagged dependent variable

as a regressor in the first step may seriously influence the test for a unit root at
the semiannual frequency, contrary to what is argued by Canova and Hansen
(1993).
From Table 6 it is indeed obvious that the inclusion of a lag of the dependent
variable as a regressor implies a large increase in the erroneous rejection of
a semiannual unit root. The CH test for a semiannual unit root is especially
badly affected if the other seasonal component (i.e., the annual component) is
stationary.

(G) What are the eficts on the power and size of the CH test of preadjusting the
observations by a first diflerence ?

Obviously, if the process is a zero frequency unit root process, the first
difference operator is a suitable adjustment, but if the long-run component is
stationary, the CH test may suffer from presupposing a unit root. The results of
the Monte Carlo experiments on a model where the long-run component is

Table 6
Rejection frequencies for the CH test for semiannual unit root IL.,,~;auxiliary regression with one
and no lag of dy, as regressor

DGP: (1 - B)x, = m, + E, + S,, (1 + B)(l + g:B’)S, _ t,, E,, <, 5 nid(O, 1)

g3 = 1.0 g3 = 0.70

T 1 lag 0 lag 1 lag 0 lag

48 0.68 0.14 0.93 0.04

100 0.30 0.04 0.95 0.00
136 0.20 0.03 0.95 0.00
200 0.09 0.01 0.94 0.00
 S. Hylleberg / Journal of Econometrics 69 (1995) 5-25 23

stationary but relatively big (ai = 0.7) showed little or no effect of first-order
differencing the data when compared to a case where the first differencing is just
right.

4. Summary

The results of the Monte Carlo experiments can be summarized as follows.

0) The test suggested by Canova and Hansen (1993), the CH test, should not
be based on an auxiliary regression with one lag of the dependent variable
as regressor as it leads to a large and incorrect increase in the rejection of
a semiannual unit root.
(ii) The CH test rejects a unit root too often when there exists a unit root at
other frequencies and the sample is small, but the rejection frequency falls
with an increase of the sample size.
(iii) The CH test is not effected significantly by the choice of kernel function or
method of bandwidth selection as far as this is done carefully.
(iv) The preadjustment of the data by first differencing them has no significant
effect on the CH test when a DGP with a zero frequency unit root is
compared to stationary processes which could be misinterpreted as non-
stationary processes, i.e., processes with a real root not too far from 1.
(v) The CH test is very sensitive to the existence of moving average errors and
unit roots at other unattended frequencies. In case of a first-order MA
error process, the CH test wrongly rejects a unit root at the semiannual
frequency far too often when there is an annual nonstationary seasonal
component, but the test does all right if no such component is present.
However, then the test for a nonexisting annual unit root never rejects the
unit root.
(vi) The test suggested by Hylleberg, Engle, Granger, and Yoo (1990) the
HEGY test, depends critically on the proper augmentation. If the lag
distribution is underparameterized in relation to what is necessary to
render the errors white noise, the size is huge, and if the lag distribution is
overparameterized, the power is very low, especially for a small sample
size.
(vii) The HEGY test of a semiannual unit root has very high size and no power
against the stationary alternative when the error process is a first-order
moving average process, and the size of the test for an annual unit root
seems to increase with the sample size when no lags are used to augment
the auxiliary regression. In case the auxiliary regression is augmented, the
performance of the test improves considerably.
(viii) While the size and the power of the HEGY test is reasonable when the
DGP is an AR model, the test cannot cope with a very weakly changing
24 S. Hylleberg /Journal of Econometrics 69 (199.5) 5-25

seasonal component in addition to a strong deterministic seasonal pattern.

The performance of the CH test seems to improve considerably even in
such case when the sample size increases.

Hence the best advice is to apply both tests, as they complement each other in
several respects. This implies that if both tests come out with the same answer,
one may have confidence in the result. In case of two different answers, one
should probably do more analysis and obtain more information; but when this
is not possible or too costly, some guidance on which test to rely on is presented
in the summary above.

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