A New Unit Root Test Against LSTAR Nonlinearity without Threshold

Abstract

In this paper, a simple unit root test was proposed against the alternative of stationary LSTAR nonlinearity without a threshold effect. The critical values, size and power properties were examined with Monte Carlo simulations. The power of the developed test was compared with linear Dickey and Fuller (DF) (1979) and nonlinear Kapetanios, Shin and Snell (KSS) (2003) unit root tests. The developed test (F_(LSTAR,c=0) ) assumed that no-threshold effect is more suitable than the comparable ones. The empirical application of the test was carried out for industrial production data from OECD countries and Europe 1961(i) - 1986(iv). The data used in the application part has been chosen, because it is suitable for the LSTAR model structure. The contribution of the study to the literature is to obtain an alternative test mechanism that explains the unit root structure of time series LSTAR model structure without a threshold. Empirical application results show that the use of the test is appropriate under the relevant model structure.