Lag Order and Critical Values for the RMA Based Augmented Dickey-Fuller Test

Abstract

This thesis examines the validity of asymptotic critical values for a Recursive Mean Adjustment (RMA) based Augmented Dickey-Fuller (ADF) unit root test. Cheung and Lai show that critical values for the Ordinary least square (OLS) based ADF test depend substantially on the lag order in finite samples. The present article extends their work to a newly proposed RMA-based unit root test, which is more powerful than the OLS-based test. Our Monte Carlo simulation results show that asymptotic critical values for the test with the deterministic terms are valid only when the lag order is one. When lag order is greater than one, the RMA based test with asymptotic critical values tends to be overall over-sized. I also provide finite sample critical values for an array of lag-order and sample size pairs.