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Sunil Paul
Lecture Notes
recap
Sunil Paul
Lecture Notes
Summary of DF tests
Model
Yt = c + t + Yt1 + t
Yt = c + Yt1 + t
Yt = Yt1 + t
Sunil Paul
Hypotheses (H0 )
=0
==0
==c =0
=0
=c =0
=0
Lecture Notes
test statistics
t
3
2
Multiple roots
If you suspect two unit root take first difference and conduct
DF test
2 Yt = D + 1 Yt1 + t
where Dt is the deterministic terms like drift, trend etc.
Sunil Paul
Lecture Notes
Multiple roots
If the null is rejected the null of single unit root can be done
in the usual DF test (You can find an alternative procedure in
Enders)
Sunil Paul
Lecture Notes
Sunil Paul
Lecture Notes
If lag is too large, then the power of the test will suffer
Sunil Paul
Lecture Notes
Given Yt =
P
0 + 1 D1 + 2 D2 + 3 D3 + Yt1 + pi=2 i Yti+1 + t
Sunil Paul
Lecture Notes
The PP unit root tests differ from the ADF tests mainly in
how they deal with serial correlation and heteroskedasticity in
the errors.
The tests usually give the same conclusions as the ADF tests
Sunil Paul
Lecture Notes
DF:t iid
PP:t serially correlated
Yt = c + Yt1 + t
Sunil Paul
Lecture Notes
I
I
I
b2
b2 and
The terms
b2 are the estimates of variance parameters
2 = lim T 1
T
PT
andST = t=1
PT
t=1
E (2t ) , 2 = lim
PT
t=1
E (T 1 ST2 )
Sunil Paul
Lecture Notes
Power The ADF and PP tests are known to have low power
against the alternative hypothesis that the series is stationary
(or TS) with a large autoregressive root
Size The ADF and PP tests are known to have severe size
distortion (in the direction of over-rejecting the null) when the
series has a large negative moving average root.
Sunil Paul
Lecture Notes
KPSS test
I
Consider Yt = t + rt + t ,
where
t is the deterministic trend,
rt = rt1 + t , t WN(0, 2 ) is random walk and
t is stationary error.
Lecture Notes
KPSS test
I
T 2
T
X
!
Sbt2
be2
t=1
Pt
Sunil Paul
Lecture Notes