Abstract
This paper investigates the limiting properties of the Canova and Hansen test, testing for the null hypothesis of no unit root against seasonal unit roots, under a sequence of local alternatives with the model extended to have seasonal dummies and trends or no deterministic term and also only seasonal dummies. We derive the limiting distribution of the test statistic and its characteristic function under local alternatives. We find that the local limiting power is an inverse function of the spectral density at frequency π (π/2) when we test against a negative unit root (annual unit roots). We also theoretically show that the local limiting power of the Canova and Hansen test against a negative unit root (annual unit roots) does not increase when the true process has annual unit roots (a negative unit root) but not a negative unit root (annual unit roots), which has been observed in Monte Carlo simulations in such research as Caner (1998, Journal of Business and Economic Statistics 16, 349–356), Canova and Hansen (1995, Journal of Business and Economic Statistics 13, 237–252), and Hylleberg (1995, Journal of Econometrics 69, 5–25).
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