Power of a Unit-Root Test and the Initial Condition

It is now well known that how the initial observation is generated can have a significant effect on the power of a unit-root test. In this article, we show that by taking a simple data-dependent weighted average of the initial condition-robust test of Elliott and Müller [Journal of Econometrics (2006), forthcoming] and the standard augmented Dickey-Fuller test, we are able to produce a new unit-root test that can improve power, both asymptotically and in finite samples, over a wide range of possibilities governing the generation of the initial observation. Copyright 2006 The Authors Journal compilation 2006 Blackwell Publishing Ltd.