STATIONARITY TESTS FOR IRREGULARLY SPACED OBSERVATIONS AND THE EFFECTS OF SAMPLING FREQUENCY ON POWER

Abstract

In this article, starting from continuous-time local level unobserved components models for stock and flow data we derive locally best invariant (LBI) stationarity tests for data available at potentially irregularly spaced points in time. We demonstrate that the form of the LBI test differs between stock and flow variables. In cases where the data are observed at regular intervals throughout the sample we show that the LBI tests for stock and flow data both reduce to the form of the standard stationarity test in the discrete-time local level model. Here we also show that the asymptotic local power of the LBI test increases with the sampling frequency in the case of stock, but not flow, variables. Moreover, for a fixed time span we show that the LBI test for stock (flow) variables is (is not) consistent against a fixed alternative as the sampling frequency increases to infinity. We also consider the case of mixed frequency data in some detail, providing asymptotic critical values for the LBI tests for both stock and flow variables, together with a finite-sample power study. Our results suggest that tests that ignore the infraperiod aspect of the data involve rather small losses in efficiency relative to the LBI test in the case of flow variables but can result in significant losses of efficiency when analyzing stock variables.We are grateful to co-editor Jeff Wooldrige, two anonymous referees, Marcus Chambers, Andrew Harvey, Rod McCrorie, Neil Shephard, and seminar participants at Nuffield College, Oxford, for their helpful comments and suggestions on earlier versions of this paper. We are especially indebted to Marcus Chambers, who suggested the formulation of the observation equations used in our continuous-time unobserved components models for stock and flow variables. All errors are ours.