Finite sample effects of pure seasonal mean shifts on Dickey-Fuller tests: A simulation study

In this paper, it is demonstrated by simulation that, contrary to a widely held belief, pure seasonal mean shifts - i.e. seasonal structural breaks which affect only the seasonal cycle-really do matter for Dickey-Fuller long-run unit root tests. Both size and power properties are affected by such breaks but using the t-sig method for lag selection induces a stabilizing effect. Although most results are reassuring when the t-sig method is used, some concern with this type of breaks cannot be disregarded. Further evidence on the poor performance of the t-sig method for quarterly time series in standard (no-break) cases is also presented.