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Unit Root Test

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54 views13 pages

Unit Root Test

Uploaded by

kirthana22022001
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Applied Macro and

Financial Econometrics

Unit Root Test


Course Instructor:
Dr. Devasmita Jena
Unit Root Test: The origin
•
Dickey Fuller (DF) Test
•
DF Test (Contd…)
•
Augmented Dickey Fuller (ADF) Test
•
ADF Test (Contd…)
•
Seasonal Unit Roots
Suppose we have either a quarterly or a monthly time series
If this series has a unit root then it is represented as (respectively):
• Yt=Yt-4+εt
• Yt=Yt-12+εt
That is, the coefficient of the seasonal lag terms (t-4) or (t-12) (as may be appropriate) has a
value of 1.
The DF and ADF test has to be suitably modified to take this into account
A note about ADF: ADF incorporates RWM, RWMD, RWMD with a stochastic time trend
Phillips Perron Unit Root Test
•
Phillips Perron Unit Root Test
The PP tests correct the ADF tests by the bias induced by the omitted autocorrelation
Under H0, the PP test statistics have the same asymptotic distributions as the ADF t-statistic and
normalized bias statistics
PP tests tend to be more powerful than the ADF tests
• Robust to general forms of heteroskedasticity in the error term εt
• No need to specify a lag length for the ADF test regression
But, they can severe size distortions (when autocorrelations of εt are negative) and they are
more sensitive to model misspecification (order of ARMA model)
Some Issues with Traditional Unit Root Tests
•
DF-GLS Unit Root Test
•
DF-GLS Unit Root Test (Contd…)
•
KPSS Unit Root Test
•

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