PRACTITIONERS CORNER: Lag Order and Critical Values of a Modified Dickey‐Fuller Test

ABSTRACTS This study examines some finite‐sample properties of a new modified Dickey‐Fuller test, called the DF‐GLS test, which has been shown to be more powerful than standard unit‐root tests. The study shows the lag order can significantly affect the critical values of the test. This points to the importance of correcting for the lag order effect in implementing the DF‐GLS test. Approximate lag‐adjusted finite‐sample critical values for the DF‐GLS test are provided, which can be straightforwardly computed from response surface equations.