Munich Personal RePEc Archive

Sharp and Smooth Breaks in Unit Root Testing of Renewable Energy Consumption: The Way Forward

Shahbaz, Muhammad and Omay, Tolga and Roubaud, David (2019): Sharp and Smooth Breaks in Unit Root Testing of Renewable Energy Consumption: The Way Forward.

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Abstract

This study proposes a flexible unit root test that detects sharp and smooth breaks simultaneously. Most unit root tests are not general enough to capture different dynamics, such as smooth structural breaks, sharp structural breaks, state-dependent nonlinearity or a mixture of them. Therefore, considering all these data structures in one unit root process is important, and the results produced with this type of test structure do not face misspecification problems. We test 9 countries’ historical renewable energy consumption covering the period of 1800-2008 with traditionally used structural break unit root tests and a newly proposed test. The newly proposed test performs better than the traditional ones. The reason is that renewable energy consumption has sharp and smooth breaks in its data generating process which are not captured simultaneously by any other traditional unit root test. The empirical results indicate that renewable energy consumption contains stationary process in the presence of sharp and smooth structural breaks.

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