Ch18

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Unformatted text preview: Testing for Unit Roots Consider an AR(1): yt = α + ρ yt-1 + et Let H0: ρ = 1, (assume there is a unit root) Define θ = ρ – 1 and subtract yt-1 from both sides to obtain ∆ yt = α + θ yt-1 + et 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 Economics 20 - Prof. Anderson 1 Testing for Unit Roots (cont) We can add p lags of ∆ yt to allow for more dynamics in the process Still want to calculate the t-statistic for θ Now it’s called an augmented DickeyFuller test, but still the same critical values The lags are intended to clear up any serial correlation, if too few, test won...
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This note was uploaded on 03/03/2009 for the course ECON 382 taught by Professor Sun during the Spring '08 term at CUNY Queens.

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