Outline

Zivot and Andrews (1992) Unit Root Testing

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Perron vs. Zivot&Andrews

Perron: exogeneous breakpoint

ZA: endogeneous breakpoint

Instead of removing the years of possible events that might cause the break,

Null Hypothesis:

Alternative Hypothesis: can be represented by a trend-stationary process with one-time break in the
trend occurring at an unknown point in time.

Testing Procedure of Zivot&Andrews

The goal is to estimate the breakpoint that gives the most weight to the trend-stationary alternative i.e, the
least favorable result for the null hypothesis using

ranging from
Then , it is set that , and standard t statistics,is computed

That is, is chosen so as to minimize one-sided t-statistic for testing

Let denote such a minimizing value for model i. Then by definition,

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Testing Procedure of Zivot&Andrews

Following Perrons ADF testing strategy, the regression equations to test for a unit root are:

(1)

(2)

(3)

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Testing Procedure of Zivot&Andrews

The breakpoints and minimum t-statistics is determined as follows:

For each series, (1), (2) and (3) is estimated by OLS with the break fraction
For each value of , the number of extra regressors, k is determined and the t-statistic for
testing is computed.
The minimum t-statistics reported are the minimums over all T-2 regressions, and the break
years are the years corresponding to the minimum t-statistics.
k, -the number of extra regressors- required for the ADF are allowed to vary for each
tentative choice of, and determined by a selection procedure by working backwards from
(Choosing the first value of k such that the t-statistic on is greater than 1.6 and the t-statistic
on for is less than 1.6.)

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Testing Procedure of Zivot&Andrews

Break years that minimizes the one-sided t-statistic for testing does correspond to some
economic events that might create a break actually in some of the series, and to some dates in
which an economic interpretation is not possible at all.

But mainly, the structural breaks in data caused by Great Depression and Oil Crisis are catched
by this endogenous model, as of Perrons, although a few quarters differ.

Zivot&Andrews breakpoint algorithm is generally, though not completely, consistent with the
subjective selection procedure of Perrons.

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Testing Procedure of Zivot&Andrews

However, when is not exogenously determined, Perrons critical values are no longer can be used to
test the unit-root hypothesis since Perrons unit root tests are biased toward rejecting the unit-root
hypothesis because critical values are too small in absolute value.

Zivot&Andrews interpretation of Perrons unit-root test becomes:

Reject the null of a unit root if;

where denotes the size left-tail critical value from the asymptotic distribution of

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Finite-Sample Results
Sample size for the series under consideration of Zivot&Andrews range from T=62 to T=111
Thus, Zivot&Andrews asymptotic critical values may differ from the appropriate finitesample critical values.
Critical values of finite sample generated by Monte Carlo Simulation

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Finite-Sample Results

Zivot&Andrews suppose the errors driving the data series are normal processes.

In this case, the first differences of the series are normal processes, possibly with nonzero
mean, under the null hypothesis.

To determine p and q, models are fit to first differences of each series and the model-selection
criteria of Akaike (1972) and Schwarz (1978) is sed to choose the optimal with

Then Zivot&Andrews treat the optimal estimated models as the true data-generating process for
the errors of each of the series.

It is seen that in most cases Akaike and Schwarz criteria has selected the same model, in those
they did not, the most parsimonious model is selected.

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

Finite-Sample Results
To determine the finite-sample distributions of the test-statistics under the null-hypothesis with

preceding error distributions, the following Monte Carlo experiment is performed:

For each series, a pseudo sample of size equal to the actual size of the series using the
optimal models with innovations is constructed.
Then for each , it is set that and is determined as described earlier, and is computed.
Zivot&Andrews test statistic is then determined to be the minimum t-statistic over all
T-2 regressions.
This process is repeated 5,000 times and the critical values for the finite sample
distributions are obtained from the sorted vector of replicated statistics.
The salient feature of the Zivot&Andrews critical values is that they are all uniformly
larger (in absolute value) than the corresponding average asymptotic critical values.

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

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Empirical Applications
Zivot &Andrews(1992) also provides an application of the unit-root test to the data series that
Perron(1989) also analysed.
There are two differences;
1) Break years defining the dummy variables are slightly different
2) Z&A do not impose a structural break under the null hypothesis

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

11

Empirical Applications

Empirical Applications

Empirical Applications

Empirical Applications

Empirical Applications

Concluding Remarks for Zivot&Andrews (1992)

Zivot&Andrews transforms Perrons unit root test that is conditional on structural change at a known
point in time to an unconditional unit-root test.
The null hypothesis of Zivot&Andrews is a unit-root process without any exogenous structural breaks,
and the relevant alternative hypothesis is a trend stationary process with possible structural change
occuring at an unknown point in time.
Using the estimated breakpoint asymptotic distributions, Zivot&Andrews find less conclusive evidence
against the unit root hypothesis than Perron(1989) found for many of the data sets.

A Survey on Unit Roots and Structural Breaks:

Zivot&Andrews (1992)

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