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In this paper, the authors study the size distortions of the KPSS test for stationarity when serial correlation is present and samples are small and medium-sized. It is argued that two distinct sources of the size distortions can be identified. The first source is the finite-sample distribution of the long-run variance estimator used in the KPSS test, while the second source of the size distortions is the serial correlation not captured by the long-run variance estimator due to a too narrow choice of truncation lag parameter.
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