Testing for a Unit Root in a Process Exhibiting a Structural Break in the Presence of GARCH Errors.

This paper considers the effect of GARCH errors on the tests proposed by Perron (1997) for a unit root in the presence of a structural break. We assess the impact of degeneracy and integratedness of the conditional variance individually and find that, apart from in the limit, the testing procedure is insensitive to the degree of degeneracy but does exhibit an increasing over-sizing as the process becomes more integrated. When we consider the GARCH specifications that we are likely to encounter in empirical research, we find that the Perron tests are reasonably robust to the presence of GARCH and do not suffer from severe over- or under-rejection of a correct null hypothesis. Copyright 2002 by Kluwer Academic Publishers