On the Robustness of Unit Root Tests in the Presence of Double Unit Roots

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We examine some of the consequences on commonly used unit root tests when the underlying series is integrated of order two. It turns out that standard augmented Dickey-Fuller type of tests for a single unit root have excessive density in the explosive region of the distribution. The lower (stationary) tail, however, will be virtually unaffected in the presence of double unit roots. On the other hand, the Phillips-Perron test is shown to diverge to plus infinity asymptotically and thus will favor the explosive alternative. Numerical simulations are used to demonstrate the analytical results and some of the implications in finite samples.

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