The asymptotic size and power of the augmented Dickey.Fuller test for a unit root

It is shown that the limiting distribution of the augmented Dickey.Fuller (ADF) test under the null hypothesis of a unit root is valid under a very general set of assumptions that goes far beyond the linear AR(.) process assumption typically imposed. In essence, all that is required is that the error process driving the random walk possesses a continuous spectral density that is strictly positive. Furthermore, under the same weak assumptions, the limiting distribution of the ADF test is derived under the alternative of stationarity, and a theoretical explanation is given for the well-known empirical fact that the test's power is a decreasing function of the chosen autoregressive order p. The intuitive reason for the reduced power of the ADF test is that, as p tends to infinity, the p regressors become asymptotically collinear.