Chapter 1.
Unit Root Tests
EViews 4.1 includes support for the newest generation of unit root tests. In addition
to the existing Augmented Dickey-Fuller (1979) and Phillips-Perron (1998) tests,
EViews now allows you to compute the GLS-detrended Dickey-Fuller (Elliot, Rothen-
berg, and Stock, 1996), Kwiatkowski, Phillips, Schmidt, and Shin (KPSS, 1992),
Elliott, Rothenberg, and Stock Point Optimal (ERS, 1996), and Ng and Perron (NP,
2001) unit root tests.
In addition, EViews now allows you to perform Newey-West (1994) and Andrews
(1991) automatic bandwidth selection for kernel based estimators, or automatic infor-
mation criteria based selection of lag length for Dickey-Fuller tests and AR spectral
density estimators.
The command support for these new unit root features is documented in
uroot
(p. 43)
.
Performing Unit Root Tests in EViews
The following discussion assumes that you are familiar with the basic forms of the
unit root tests, and the associated options. We provide theoretical background for
these tests in
“Basic Unit Root Theory” beginning on page 9
, and document the set-
tings used when performing these tests.
To begin, double click on the series
to open the series window, and
choose
View/Unit Root Test…
You must specify four sets of
options to carry out a unit root test.
The first three settings (on the left-
hand side of the dialog) determine
the basic form of the unit root test.
The fourth set of options (on the
right-hand side of the dialog) con-
sist of test specific advanced set-
tings. You only need concern
yourself with these latter settings if you wish to customize the calculation of your
unit root test.
First, use the topmost combo box to select the type of unit root test that you wish to
perform. You may choose one of six tests: ADF, DFGLS, PP, KPSS, ERS, and NP.
6
—Chapter 1. Unit Root Tests
Next, specify whether you wish to test for a unit root in the level, first difference, or second
difference of the series.
Lastly, choose your exogenous regressors. You can choose to include a constant, a constant
and linear trend, or neither (there are limitations on these choices for some of the tests).
You can click on
OK
to compute the test using the specified settings, or you can customize
your test using the advanced settings portion of the dialog.
The advanced settings for both the ADF and DFGLS tests allow you to specify how lagged
difference terms
are to be included in the ADF test equation. You may choose to let
EViews automatically select
, or you may specify a fixed positive integer value. If you
choose automatic selection, you are given the additional option of selecting both the infor-
mation criterion and maximum number of lags to be used in the selection procedure.
In this case, we have chosen to estimate an ADF test that includes a constant in the test
regression and employs automatic lag length selection using a Schwarz Information Crite-
rion (BIC) and a maximum lag length of 14. Applying these settings to data on the U. S.