Dear Members,
I am using different commands to test for the presence of a unit root in macroeconomic variables. These include dfgls, dfuller, pperron and kpss.
I read the help file of the kpss command and I was in doubt when the auto option is appropriate. The help of the command indicates that
"The maximum lag order for the test is by default calculated from the sample size using a rule provided by Schwert (1989) using c=12 and d=4 in his terminology. The maximum lag order may also be provided with the maxlag option, and may be zero. If the maximum lag order is at least one, the test is performed for each lag, with the sample size held constant over lags at the maximum available sample.
Alternatively, the maximum lag order (bandwidth) may be derived from an automatic bandwidth selection routine, rendering it unnecessary to evaluate a range of test statistics for various lags. Hobijn et al. (1998) found that the combination of the automatic bandwidth selection option and the Quadratic Spectral kernel yielded the best small sample test performance in Monte Carlo simulations."
It is on possibility stated by the second paragraph, i.e. the use of the auto option, that I am particularly interested. More precisely, I am not quite sure why I should NOT use auto given its parsimonious result (despite the kpss test seems to over reject the null of stationarity too often)
I would be very thankful if anyone could provide me with an insigth.
Many thanks.
I am using different commands to test for the presence of a unit root in macroeconomic variables. These include dfgls, dfuller, pperron and kpss.
I read the help file of the kpss command and I was in doubt when the auto option is appropriate. The help of the command indicates that
"The maximum lag order for the test is by default calculated from the sample size using a rule provided by Schwert (1989) using c=12 and d=4 in his terminology. The maximum lag order may also be provided with the maxlag option, and may be zero. If the maximum lag order is at least one, the test is performed for each lag, with the sample size held constant over lags at the maximum available sample.
Alternatively, the maximum lag order (bandwidth) may be derived from an automatic bandwidth selection routine, rendering it unnecessary to evaluate a range of test statistics for various lags. Hobijn et al. (1998) found that the combination of the automatic bandwidth selection option and the Quadratic Spectral kernel yielded the best small sample test performance in Monte Carlo simulations."
It is on possibility stated by the second paragraph, i.e. the use of the auto option, that I am particularly interested. More precisely, I am not quite sure why I should NOT use auto given its parsimonious result (despite the kpss test seems to over reject the null of stationarity too often)
I would be very thankful if anyone could provide me with an insigth.
Many thanks.
