ch18 - Testing for Unit Roots Consider an AR(1 yt = yt-1 et...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 20 - Prof. Anderson 1 Testing for Unit Roots Consider an AR(1): y t = α + ρ y t-1 + e t Let H 0 : = 1, (assume there is a unit root) Define θ = – 1 and subtract y t-1 from both sides to obtain y t = + y t-1 + e t Unfortunately, a simple t-test is inappropriate, since this is an I(1) process A Dickey-Fuller Test uses the t-statistic, but different critical values
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Economics 20 - Prof. Anderson 2 Testing for Unit Roots (cont) We can add p lags of y t to allow for more dynamics in the process Still want to calculate the t-statistic for θ Now it’s called an augmented Dickey- Fuller test, but still the same critical values The lags are intended to clear up any serial correlation, if too few, test won’t be right
Background image of page 2
Economics 20 - Prof. Anderson 3 Testing for Unit Roots w/ Trends If a series is clearly trending, then we need to adjust for that or might mistake a trend stationary series for one with a unit root Can just add a trend to the model Still looking at the t-statistic for θ , but the critical values for the Dickey-Fuller test change
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Economics 20 - Prof. Anderson
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 10

ch18 - Testing for Unit Roots Consider an AR(1 yt = yt-1 et...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online