Finite-Sample Properties of the GLS-Based Dickey-Fuller Test in the Presence of Breaks in Innovation Variance

Using local-to-unity detrending, the GLS-based Dickey-Fuller test has been shown to possess higher power than other available unit root tests. As a result, application of this easily implemented test has increased in recent years. In the present study the finite-sample size and power of the GLS-based Dickey-Fuller test is examined in the presence of breaks in innovation variance under the null. In contrast to the original Dickey-Fuller test which has been shown to suffer severe distortion in such circumstances, the GLS-basedtest latter exhibits robustness to all but the most extreme breaks in variance.The results derived show the GLS-based test to be more robust to variance breaks than other modified Dickey-Fuller tests previously considered in the literature.