Effects of neglected deterministic seasonalityonunitroottests,Statistical Papers

Sometimes, integration tests are applied to seasonal data without al-lowing for seasonal deterministics. This paper studies the effect of neglecting seasonal dummy variables. For the Dickey-Fuller test, it is observed that the distribution is shifted to the left, with lower dis-persion at the same time, whenever deterministic seasonality is not accounted for. When accounting for serial correlation, the distortions become less predictable. A Monte Carlo study confirms that, in the presence of seasonally varying means, the (augmented) Dickey-Fuller test without seasonal dummies is oversized and has little power at the same time (due to the need of lag augmentation). The KPSS test for stationarity is also examined. It turns out that the effect of neglecting seasonal deterministics on the way the test behaves under the null hypothesis depends on the way the long-run variance is estimated. Key words Neglected seasonal means, Dickey-Fuller test, KPSS tes