A Comparison of Unit-Root Test Criteria

Author(s): Sastry G. Pantula, Graclela Gonzalez-Farias and Wayne A. Fuller

Source: Journal of Business & Economic Statistics, Vol. 12, No. 4 (Oct., 1994), pp. 449-459
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? 1994 American Statistical Association Journal of Business & Economic Statistics, October 1994, Vol. 12, No. 4

A Comparison of Unit-Root Test Criteria

Sastry G. PANTULA
Department of Statistics, North Carolina State University, Raleigh, NC 27695-8203
Graciela GONZALEZ-FARIAS

Departmento de Mathematicas, ITESM, Monterrey, NL 64849, Mexico

Wayne A. FULLER
Department of Statistics, Iowa State University, Ames, IA 50011
During the past 15 years, the ordinary least squares estimator and the corresponding pivotal
statistic have been widely used for testing the unit-root hypothesis in autoregressive processes.
Recently, several new criteria, based on maximum likelihood estimators and weighted symmetric
estimators, have been proposed. In this article, we describe several different test criteria. Results
from a Monte Carlo study that compares the power of the different criteria indicate that the
new tests are more powerful against the stationary alternative. Of the procedures studied, the
weighted symmetric estimator and the unconditional maximum likelihood estimator provide the
most powerful tests against the stationary alternative. As an illustration, the weekly series of
one-month treasury-bill rates is analyzed.

KEY WORDS: Autoregressive processes; Maximum likelihood estimators; Weighted symmetric

estimators.

Testing for unit roots in autoregressive (AR) processes

has received considerable attention since the work by Fuller

where the et's are independent random variables with mean 0

and variance o2. Assume that YI is independent of et for

t > 2. We are interested in testing the null hypothesis

(1976) and Dickey and Fuller (1979), who considered tests

based on the ordinary least squares (OLS) estimator and the
corresponding pivotal statistic. Several extensions of the
procedures that they suggested exist in the literature. See
Diebold and Nerlove (1989) for a survey of the unit-root

that p = 1. Different estimators and test criteria are obtained depending on what is assumed about Y1. Test criteria
are typically constructed using likelihood procedures under
the assumption that the et's are normally distributed. The
asymptotic distributions of the test statistics are, however,
valid under much weaker assumptions on the distribution of

literature. Recently, Gonzalez-Farias (1992) and Dickey

and Gonzalez-Farias (1992) considered maximum likelihood
(ML) estimation of the parameters of the AR process and

et. Moreover, the limiting distributions do not depend on

Y1. We present some different test statistics and summarize

suggested tests for unit roots based on these estimators. Elliott and Stock (1992), Elliott, Rothenberg, and Stock (1992),

their asymptotic distributions. We refer the reader to Dickey

and Elliott (1993) developed most powerful invariant tests for

and Fuller (1979, 1981), Elliott et al. (1992), Elliott (1993),

testing the unit-root hypothesis against a particular alternative

Fuller (1992), and Gonzalez-Farias (1992) for the proofs of

and used these tests to obtain an asymptotic power envelope.

the asymptotic results.

Both approaches produced tests against the alternative of a

1.1 Y1 Fixed

root less than 1 with much higher power than the test criteria

based on the OLS estimators. See also Hwang and Schmidt

When YI is considered fixed and et ,, NI(0, a2), maximizing the log-likelihood function is equivalent to minimizing

(1993).
We summarize the new approaches, introduce a new test,

Qc(P, p, a2) = (n - 1) log a2

and use Monte Carlo methods to compare the power of the

test criteria in finite samples. In Section 1, we introduce the

"+- [,-(1 - p) -pt_1]1

model and present different unit-root test criteria. In Section

t=2

2, we present a Monte Carlo study that compares the power

=(n - 1) log a2 "1-2 Qs(#, p). (1.2)

of the new approaches to that of existing methods. In Section

3, we give extensions. In Section 4, we analyze a data set to

illustrate the different test criteria. In Section 5, we present

In this case, the conditional ML estimator of p is the same

as the OLS estimator p,,OLS, obtained by regressing Yt on 1
and Yt_1 for t = 2, 3,..., n. The OLS estimator of p is

our conclusions.

1. TEST CRITERIA

in

P,-OLS - Y(l)) - Z - Y(1))Yt.

Consider the model

There are three common approaches for constructing a test2

Yt = M(1 - p) + pYt-1 + et, t > 2, (1.1)

There are three common approaches for constructing a test

449

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450 Journal of Business & Economic Statistics, October 1994

Table 1. Limiting Null Distributions of Statistics

1.2 Y1 "-a N(p, a2)

Procedure, statistic Limiting distribution

If Y1 is assumed to be a normal random variable with mean

yi and variance a2, maximizing the log of the likelihood func-

OLS

n(1A,OLS - 1) [G - H2]-[5 TH]

A,,o [G - H2]-1/2[_ TH]

4IOLS 72 + [G - H2]- [ - TH]2

MLE for Y1 " N(IA, #2)

n(I,M - 1) G-'1
I,ML G-1/2t
1,ML

G-'I2

tion is equivalent to minimizing

Q0(7l, p, a2) = log a2 + -2(y1 - )2+ Qc(L , pa2), (1.5)

where Qc(pp, p, a2) is defined in (1.2). The first observation
enters the quantity (1.5) but not (1.2) because Y1 is random
with variance a2 under the model that leads to (1.5). The ML
estimators minimize Ql (i/, p, a2) and satisfy

Elliott and Stock

n(P7,GLS - 1) G-

1,ML = ln )- (p,ML) 2(1.6)

1+(n- 1) P1 -),

77,GLS G-1/2

4rES 49G + 14t + 7

En ( ,-;....) .0_.

P1,ML t (YtI-,-,L) (1.7)

Weighted symmetric

n(Aws - 1) [G - H2]-1[C - TH - G + 2H2]

"fws [G - H2]-1/2[t - TH - G + 2H2]

and

,ML = n-1 ( ML)

n

S [Y - Pl,ML - P,ML)

of the hypothesis that p = 1. For the first-order process, one

can construct a test based on the distribution of the estimator

t=2

- 1,MLYt-1] 2 (1.8)

of p. A second test is obtained by constructing a pivotal statis-

tic for p by analogy to the usual t test of regression analysis.

This is the most used test in practice because the pivotal ap-

proach extends immediately to higher-order processes. The

pivotal statistic associated with the OLS estimator is

Substituting (1.6) in (1.7) and simplifying, we get that

n(p1l,ML - 1) is a solution to a fifth-degree polynomial. Using the arguments of Gonzalez-Farias (1992), it is possible
to show that the limiting distribution of n(p'f,ML - 1) is that

of G-'I. Recall that G-' is also the limiting representation

OLS = [O (S,_ltZ - )] (12 P,OLs - 1), (1.3)

L -t=2j

where [Y(o), (-1)] = (n - 1)- En2 Yt, Yt-11] and

of n(FOLS - 1), where PoLS is the OLS estimator obtained by

regressing Y, on Yt_1 without an intercept. The percentiles of

G-lI may be found in table 8.5.1 of Fuller (1976). The pivotal and the likelihood-ratio-type statistics for testing p = 1
are

Ls= (n - 3) [Y, - Yo) - ,OLS (t-1 t=2

A third test can be constructed on the basis of the likelihood

ratio. The null model with p = 1 reduces (1.1) to the random

walk. The sum of squares associated with the null model

is _t2(Yt - Y1_1)2, and a likelihood-ratio-type statistic for
testing p = 1 is

n n 1/2

71,ML [Y-rY t1 - ,I,ML)2 ( 1,ML - 1) (1.9)

t=2

and

4)i1,ML = n(s2 - ( )1, (1.10)

where s2 = (n 1)-1 2(Yt - Yt_1)2. The limiting distributions of these statistics are given in Table 1. We make a

COLS = (2LS2s)- Yt -- Yt-1) -- (n - 3)2LS (1.4)

few remarks before considering the next case.

Remark 1.1. Assume that p = 1. Let pbe any estimator

The limiting distributions of the statistics, derived by Dickey

of p such that = 1 +O,(n-'). Then, 2 in (1.6) evaluated at

and Fuller (1979, 1981), are given in Table 1. For example,

is Y1 + Op(n-1/2). Likewise, if / is fixed at j, then the value

of p that maximizes the likelihood is obtained by regressing

4OLS converges in distribution to T2 + [G - H2]-1 T - 2,

where = .5[T2 - 1], T = W(1),

G = W2(t)dt, H = W(t)dt,
and W(t) is a standard Brownian motion on [0, 1]. Empirical

Y - j on Yt-1 - j. If j is such that j = Yi + O,(n-1/2), then

n[p^(j) - 1] - G-'1 and the estimator has the same largesample behavior as the estimator obtained by regressing Yt
-Y1 on Yt-1 - Y1, which was suggested by Dickey and Fuller

(1979). See also Chan and Wei (1987) and Chan (1988).

tables 8.5.1 and 8.5.2 of Fuller (1976). The percentiles for

percentiles for n(p,,OLS - 1) and ,OLs may be found in

Remark 1.2. Based on Remark 1.1, several approximations to the ML estimator are possible. We consider the

OLS were given by Dickey and Fuller (1981).

following estimators in our study.

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Pantula, Gonzalez-Farias, and Fuller: A Comparison of Unit-Root Test Criteria 451

1. Let P = Pp,OLS. Compute iteratively 4' M and

p- using (1.6) and (1.7) with pl,ML and iI,ML replaced by

on the iteration number i. Even though the asymptotic distribution of n[f) - 1] obtained for a finite i is not the same

pi- and A,.. This iterative procedure, if it converges,

as that of n[fu,ML - 1], the observed empirical distribution

and the power are similar for the two procedures. In this

mark 1.1, it follows that the statistics have the asymptotic

article, we consider n[p - 1] obtained in the 6th iteration,

starting the iterations with the simple symmetric estimator
given in Section 1.4. The choice of the initial estimator and
the number of iterations are the same as the ones considered

converges to the ML estimator. In our study, we use the

statistics obtained at the tenth iteration (i = 10). From Rerepresentations given in Table 1. In our simulations, we call
these estimators the ML estimators and omit the superscripts.

2. Elliott and Stock (1992) suggested using the statistic

(ES = ns-2 [6S - s2] + 7, (1.11)

by Gonzalez-Farias (1992). We shall call (6) the UMLE and

omit the (6) exponent. The corresponding pivotal statistic is

S= [V{}-]-1/2n[U- 1], (1.16)

where A7 = i(PT) is the A of (1.6) evaluated with p7 in place

of ,ML, P7 = 1 - 7n- s is the estimator (1.8) with p1,ML

replaced with 17, and Pl,ML is replaced with p7. They argued
that IES is the most powerful invariant test for testing p = 1

against the alternative Ha: p = P7. The alternative p7 was

selected by finding the point that is approximately tangent to
the asymptotic power envelope at a power of 50%.

3. Elliott et al. (1992) considered

P7,GLS =P(k7), (1.12)

obtained by regressing Y, - '7 on Y,_1 - I 7, without an

where V{(iU} is the variance of iju computed from the estimated information matrix. The limiting distribution of Tj
was given by Gonzalez-Farias (1992).

1.4 Symmetric Estimators

If a normal stationary AR process satisfies (1.1), it also
satisfies the equation Yt = p(1 - p) + p Yt+ + ut, where ut
, NI(O, a2). This symmetry leads one to consider estimators
of p that minimize
n

intercept. They called the estimator P7,GLS the Dickey-Fuller

generalized least squares (GLS) estimator of p. Let '7,GLS

denote the corresponding pivotal statistic for testing p = 1.
The limiting distribution of r7,GLS is given in Table 1.

1.3 YV 1 N[/A, (1 - p2)-1o2]

Suppose that Y1 is a normal random variable with mean IL

and variance (1 - p2)-1a2, for Ipl < 1. Then maximizing

the log of the likelihood function is equivalent to minimizing

Qu (/l, p, 2) = log a2 + log (1 - p2) + (1 - p2)a-2

x (Y1 - t)2 + QC(t,p, a2). (1.13)

= Z (yt - Pyt-2+ (1- Wt+1)(Yt- PYt+1)

t=2

n[5jU,ML - 1] is that of the unique negative root of

4

Ebix =0, (1.14)

i=O

t=l

where w,, t = 2,3,..., n, are weights yt = Y, - y, and

S= n-' 1 -, Yt. Observe that the OLS estimator is a member
of this class with all wt equal to 1. Dickey, Hasza, and Fuller
(1984) discussed the properties of the simple symmetric estimator obtained by setting wt = .5. Another member of the
class of symmetric estimators was studied by Park and Fuller
(1993). The estimator is obtained by setting wt = n-'(t - 1)
and is called the weighted symmetric (WS) estimator. The
WS estimator for the first-order model is

Pws = Pws() = 1=2 t-tn , (1.17)

Gonzalez-Farias (1992) showed that the unconditional ML

estimator (UMLE) u,ML of p is a solution to a fifth-degree
polynomial. She showed that the asymptotic distribution of

n-1

and

n-1 n -1/2

,rws() = [Pws - 1] y2 - n ]- 1 2 (1.18)

Lt=-2 =-I

is the pivotal statistic, where aw = (n - 2)-'1Qw(ws). The

where bo = -4, b4 = 2(G - H2), bi = -8(Q - TH + H2)

limiting distributions of the statistics are given in Table 1.

+2(T - 2H)2 + 4, b2 = 8(G - H2) + 8( - TH + H2) - 1, and

b3 = -2( - TH + H2) - 8(G - H2). For a given p, the value

The WS estimator and the ML estimator yield similar values

for samples that produce ML estimates not too close to 1,

of l that minimizes (1.13) is

say less than 1 - .iln. For samples that produce estimates

close to 1, the ML estimator is always less than 1, But the
WS estimator can exceed 1 for some models. The WS es-

Y1 + (1 - p) _21Yt + Yn
2 + (n - 2)(1 - p)

Moreover, for a given p, (1.13) is maximized at the p that

timator is easier to compute than the ML estimator. Both

equation (1.15) and the cubic equation can be solved iteratively. If the iterations converge, the estimators converge to

the simple symmetric and the weighted symmetric estimators treat observations at the beginning of the sample period
in the same way as observations at the end of the sample
period.

the UMLE'S of p and p. Gonzalez-Farias (1992) also de-

The limiting distribution of the two-step WS estimator

is the solution to a cubic equation (see Hasza 1980). The

rived the asymptotic distribution of = tu(i t ), obtained

at the ith iteration, starting with an initial estimator of p. The

distribution of U(O) depends on the initial estimator and

of p that replaces y with the estimator of p, denoted by

Zws, obtained by substituting pws(Y) into (1.15) has been obtained. Our simulations indicate that pws(,ws) and ,ws(jws)

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452 Journal of Business & Economic Statistics, October 1994

Table 2. Empirical 5% Critical Values for Different

have about the same power as p(ys0) and '(y), respec-

tively. Moreover, iterating the procedure did not produce

any significant change in empirical power, and hence the iterated estimators are not included in the reported simulation
results.

The simple symmetric estimator was included in our original Monte Carlo simulations. Because the power of the WS

Unit-Root Test Criteria

Test

statistic

25

50

100

250

oo

nlP,OLS- 1] -12.50 -13.30 -13.70 -14.00 -14.10

n[p,ML - 1] -12.4 -11.93 -10.41 -8.95 -8.10

estimator always exceeded that of the simple symmetric esti-

n[P7,GS - 1] -10.95 -10.16 -9.35 -8.64 -8.10

mator, we do not report the results for the simple symmetric

n[pws - 1] -12.03 -12.48 -12.69 -12.88 -13.07

estimator.

n[p.- 1] -12.02 -12.49 -12.76 -12.95 -13.13

rA,,oLS -3.00 -2.93 -2.89 -2.88 -2.86

",M" -2.75 -2.53 -2.28 -2.07 -1.95

1.5 Other Criteria

We considered two other estimation criteria. The test

criteria associated with the /P obtained by regressing Yt -

Uo(Pu,oLS) on Yt-1 - iU(P,,OLS), where 2u() is defined in

(1.15), had powers much smaller than those based on the

ML and WS estimators, and hence the powers are not re-

ported here. Moreover, we investigated an estimator P7,ULS

similar to P7,GLS that is obtained by regressing Yt - 'u(P7)

7tGLS -2.56 -2.30 -2.14 -2.03 -1.95

7"u -2.75 -2.69 -2.66 -2.65 -2.64

""ws -2.66 -2.61 -2.56 -2.54 -2.50

4OLS 5.25 4.86 4.72 4.61 4.59

1,ML 6.46 5.51 4.86 4.39 4.39
(DES 2.87 2.98 3.09 3.19 3.96

NOTE: Except for (DOLS and 4N1.ML, reject Ho for values of the statistic less than the

critical values.

on Yt-1 - iu(P7), where p7 = 1 - n-17. The powers of

criteria based on p7,ULS are small compared to the powers

of the WS estimator and hence are not reported. Elliott

(1993) presented extensions of the procedures of Elliott et al.

(1992) to the model in which the alternative is a stationary
process.

Except for (OLS and P,ML, we reject Ho: p = 1 for values of

the statistic less than the critical values given in Table 2.

2.2 Empirical Power

2. POWER STUDY, THE FIRST-ORDER PROCESS

In this section, we compare the empirical power of the
different test criteria described in Section 1. For tests based
on the estimators of p, the test is the test of p = 1 against the

alternative that p < 1. We first present the percentiles of the

In this section, we study the empirical power of the statistics described in Section 2.1. Critical values for 5%-level
tests are given in Table 2, Section 2. The percentiles for finite
samples are estimated by generating et's from a standard nor-

mal distribution. We considered two cases, (1) Y1 , N(0, 1)

test criteria and then study their empirical powers.

and (2) Y1 " N[0O, (1 - p2)-1 and generated samples of size

n = 25, 50, 100, and 250, with p = .98, .95, .93, .90, .85, .80,

2.1 Empirical Percentiles

and .70. The powers are computed based on 5,000 Monte

Carlo replications. Empirical powers are summarized in
Tables 3-6. In generating Tables 3-6, the same et's were

Our model is

Yt = A(1 - p) + pYt-1 + et, t > 2, (2.1)

used in both cases, except that Yi = el in case (1), whereas

Yi = el(1 - p2)-1/2 in case (2). The power is higher for

where et , NI(O, a2). To construct the percentiles, we let

case (1) than for case (2) for all test statistics. The tables

Y1 = el, I = 0, p = 1, and generate the et as independent

contain only the pivotal statistics and 4ES. Except for OLS,
the pivotal statistics generally have power that is comparable

standard normal random variables. The RANNOR function

in SAS (1985) is used to generate the et's. For a given sample

size n, we generated 20,000 samples of size n and computed
the different test statistics. The empirical critical value for

a 5%-level test is computed for the set of 20,000 samples.

The procedure was replicated three times and the average
of the three critical values is reported in Table 2. Empirical percentiles for the infinite case are obtained from the
asymptotic representation, as described by Dickey and Fuller

(1979).
We consider the test criteria based on the following.

1. OLS-n(p,,OLS - 1), TOLS, 4OLS

2. MLE for Y1 , N(t, 2 2)-n(j,ML - 1), ',ML, I,ML
3. Elliott and Stock-n(7,GLS - 1), T7,GLS, 4ES

4. MLE for Y1 " NI/1, (1 - p2) - 2]__ n(U 1), "?u

5. WS -- n('ws - 1), ws

to or greater than that based on n(p'- 1). For OLS, the power
of n(p',oLS - 1) is much greater than that of T,OLS but is less
than that of n(&ws - 1).

(1) Y, s N(0, 1)
The powers of the pivotal statistics ,OLS, T7,GLS, and ?ws
are plotted in Figure 1, page 455. From the tables, we observe
the following:

1. The pivotal based on OLS has low power compared

to the powers of the remaining criteria.
2. The test criterion based on the unconditional likeli-

hood, u, has powers very similar to those of ws, with 7u

being somewhat superior in small samples (n < 50).

3. For sample sizes n = 25 and 50, tests based on the

WS and the unconditional likelihood estimators have higher

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Pantula, Gonzalez-Farias, and Fuller: A Comparison of Unit-Root Test Criteria 453

Table 3. Empirical Powers for 5%-Level Test Criteria (n = 25, 5,000 replications)
p

Statistic

.98

.95

.93

.90

.85

.80

.70

Y, - N(0, 1)

A,, OLS 6.54 6.22 6.34 6.94 8.46 12.14 20.64

, ,ML 6.14 8.50 8.58 10.26 14.64 20.52 34.42
7,GLS 6.22 8.68 8.94 11.24 16.56 23.34 37.86

",nE 6.24 8.68 9.28 11.32 17.42 25.24 39.70

Ts 6.12 8.64 9.26 11.30 17.28 25.16 39.66

IES 6.30 8.84 9.96 12.28 18.20 26.64 41.54

Y, N[O, (1 -2)-'

OL,oLS 6.40 6.08 6.98 7.42 9.42 13.18 21.68

ri,Mr 5.74 6.66 7.70 8.70 12.84 19.20 32.90

"77,GLS 5.82 7.12 7.46 8.88 13.86 20.34 34.78

nEi 5.78 7.08 7.84 9.14 14.10 20.98 36.28

Ir s 5.78 7.08 7.78 9.10 13.86 20.80 36.10

I ES 5.82 6.98 7.96 9.16 14.08 20.94 35.52

power than those based on the ML estimator (?ji,ML) derived

under the assumption that Y1 has variance 2.

4. For all sample sizes, the criteria based on the unconditional likelihood and WS estimators have higher power than

4. For sample sizes n = 100 and 250, the tests based on

those based on P1,,ML and l,,ML.

5. The criteria based on the WS and the unconditional

the true model, fP,ML and ir,ML, have higher power than those

based on the WS and the unconditional likelihood estimators.

5. For small sample sizes and p close to 1, 'EPs has

likelihood have higher power than the criteria suggested by

Elliott et al. (1992).

6. The WS criteria have slightly greater power than

slightly higher power than T7,GLS, and these two test criteria have higher power than the remaining criteria. For values

the criteria based on the unconditional stationary likeli-

of p smaller than .9 and n > 100, these criteria tend to have

hood for n = 100 and 250. The likelihood procedure has

lower power than the criteria based on the unconditional likelihood and WS estimators.

slightly greater power than the ws procedure for n = 25 and

50.

(2) Y,, vN[0, (1- )-'1]

Empirical powers for this case are summarized in Tables
3-6. In Figure 2, page 456, we plot the powers of the pivotal
statistics TsoLS, ,GLS, and ws. From the tables, we observe
that comments 1-3 for Case (1) are also applicable for Case

(2).

3. EXTENSIONS
The test statistics presented here can be extended to higher-

order autoregressive and moving average (ARMA) processes.

They can also be extended to the case in which a time trend
is included in the model.

Table 4. Empirical Powers for 5%-Level Test Criteria (n = 50, 5,000 replications)
p

Statistic

.98

.95

.93

.90

.85

.80

.70

Y,r N(0, 1)

TA,,OLS 6.24 6.84 8.04 11.76 19.50 32.30 64.70

.1,ML 7.32 12.34 15.56 23.64 37.98 56.06 86.12

T,oLS 7.40 13.06 17.74 26.62 43.12 61.50 88.60

"7ru .7.46 12.90 17.00 25.50 40.84 59.32 88.02

rws 7.30 12.36 16.54 24.90 40.00 58.38 87.60

Q ES 7.52 13.42 19.22 27.40 44.58 61.82 85.02

Y, , N[O, (1-p2)-'

?,A,OLS 6.08 7.28 8.64 12.88 21.04 34.12 66.18

I,ML 6.38 9.52 13.18 19.44 33.26 51.64 84.72

7,GLS 6.08 9.96 13.50 19.98 33.48 51.66 82.42
"ru 6.20 10.06 13.46 20.18 33.78 52.66 84.44
Irws 6.06 9.78 13.16 19.68 33.10 51.84 84.80

4DEs 6.04 10.32 13.88 20.24 32.38 48.60 74.90

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454 Journal of Business & Economic Statistics, October 1994

Table 5. Empirical Powers for 5%-Level Test Criteria (n = 100, 5,000 replications)
P

Statistic

.98

.95

.93

.90

.85

.80

.70

Y N (, 1)

TAOLS 6.68 11.70 17.80 31.06 62.10 87.70 99.70

1,ML 10.92 27.60 42.02 64.40 90.54 98.84 100.00

,GoLS 10.94 29.62 44.08 67.28 90.80 97.90 99.72

""ri 10.30 25.86 38.82 59.98 88.38 98.34 100.00

Ts 10.48 26.08 39.16 60.22 88.72 98.36 100.00
IDEs 11.02 29.76 44.66 67.44 88.56 95.28 98.76
YV 1 N[O, (1-p2)-']

T,,OLS 7.08 11.80 19.06 30.14 56.20 78.92 97.64

71,ML 8.12 19.48 31.18 51.92 82.08 95.88 99.96

1t,GLS 8.10 19.50 30.20 49.80 75.32 88.36 97.60

,r 8.00 19.48 30.68 52.10 83.70 97.16 100.00

Tws 8.10 19.62 31.08 52.18 83.86 97.08 100.00

DES 8.24 19.44 28.42 47.22 69.78 82.84 93.76

3.1 Extensions to Higher-Order Processes

suggested by Phillips and Perron (1988). Elliott (1993) also

presented a similar correction for our WS estimator.

Dickey and Fuller (1979) gave extensions to higher-order

AR processes. Said and Dickey (1984) extended the results
to ARMA models of unknown order. They approximated an

Gonzalez-Farias (1992) gave an extension of the unconditional ML estimation for higher-order AR processes. Under
some regularity conditions on the roots, the ML estimation

ARMA process by a long AR process and used the test criteria

of the largest root has the same asymptotic distribution as

suggested by Dickey and Fuller (1979). This procedure is

known as the augmented Dickey-Fuller approach. Elliott
et al. (1992) and Elliott (1993) extended their procedures to

that of pU,ML in the first-order AR model. This procedure,

however, requires a search for the largest root on the real line

include AR and MA processes. They derived the limiting dis-

problem in moderately large samples. Such an estimator can

tribution of n(I,GLS - 1), '7,GLs, and IES under the assumption that et satisfy some stationary and mixing conditions.
The limiting distributions depend on a nuisance parameter

be obtained, for example, in SAS (1985) using ESTIMATE

P = (1)(p - 1) METHOD = ML. Moreover, the largest root

w2, the limiting variance of n-1/2 C1 et . They use two

approaches to estimate w2. One approach approximates et
by a higher-order AR process, whereas the second approach
uses a weighted sum of covariance-type spectral estimator

that maximizes the likelihood. Typically, this is not a severe

can be obtained by solving a pth degree polynomial in which

the coefficients of the characteristic polynomial are the ML

estimates.

For a pth-order AR process, a pivotal statistic ,ws ,pfor

testing 01 = 1 in the WS regression is obtained by minimizing

Table 6. Empirical Pbwers for 5%-Level Test Criteria (n = 250, 5,000 replications)
p

Statistic

.98

.95

.93

.90

.85

.80

.70

Y N(O, 1)

r/,OLS 11.72 44.08 73.62 96.74 100.00 100.00 100.00

1,ML 31.42 85.84 97.88 99.96 100.00 100.00 100.00
77,GLS 31.60 85.66 97.52 99.88 99.98 99.98 100.00

Sru 26.18 76.88 95.10 99.90 100.00 100.00 100.00

rws 26.70 77.88 95.34 99.94 100.00 100.00 100.00
(DES 31.06 85.02 96.78 99.82 99.94 99.94 99.98
Y, , N[O, (1 -p2)-J

OI,OLS 12.26 46.30 75.58 97.02 100.00 100.00 100.00

7,ML 19.54 60.82 80.64 94.00 99.58 99.96 100.00

7,OGLS 19.16 58.80 76.44 89.88 96.68 98.96 99.90

ru 19.28 67.92 91.38 99.72 100.00 100.00 100.00

rws 19.88 68.76 91.68 99.76 100.00 100.00 100.00

4?ES 18.78 56.26 73.32 87.06 95.28 98.26 99.80

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Pantula, Gonzalez-Farias, and Fuller: A Comparison of Unit-Root Test Criteria 455

n=25, Y1 - N(0,1) n=50, Y1 -N(0,1)

o

(0

Co

CO

0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
rho

.o

rho

0GLS

""\'.\

.0

n=Figure 1. Pbwers of Pivotal Statistics When Y, s Generated From N(,

1): OLS.n=250,Y WLS; --(--, GLS.)
SOLS(0

OLS
.. .....WLS
o--

GLS

0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
rho

rho

Figure 1. Powers of Pivotal Statistics When YI Is Generated From N(O, 1): , OLS;......., WLS; -.-.-., GLS.

process in which the orderp is taken to be the order p selected

12

by the Akaike information criterion (AIC) plus 2. That is,

(t-p) y, - ly-, 1- OiZt-i

t=p+1

i=2

our choice ofp is PAc + 2, where pAIc is the order selected by

+ ](n - t +p) yp - Olyt-p+1 +LOiZt p2 (3.1)

t=p+1

i=21

where y, = Y, - y and Z, = Y, - Yt-1. The test statistic has

the same asymptotic distribution as 's(y) for the first-order
process. One could use a GLS estimator of / instead of y.
In our simulations, however, we saw little improvement in
power from the use of an alternative estimator of the mean.
Hence we only present results for is(y). The pivotal statistic
can be obtained with any standard regression package using
the weights, dependent variable, and independent variables

the AIC. This choice of p seems to maintain the level of the

test criteria better than the use of a smaller order. Of course,
the use of a high order for the pure AR processes reduces the

power relative to the AIC for such processes. Because we

wish to compare the powers when the size is maintained, we
present results for the order PAIC + 2.

3.2 Extensions to the Time Trend Case

Dickey and Fuller (1979), Said and Dickey (1984), Elliott

et al. (1992), and Elliott (1993) presented extensions of their
procedures for the case in which linear trend is included.
Elliott et al. (1992) considered testing against the particular

given in Table 7.
In Section 3.3, we present simulation results that compare
the WS pivotal statistic with the OLS estimator. For the case

alternative p = (1 - 13.5/n) for the trend case.

The WS estimator can be easily extended to the case in

of ARMA processes, we consider the augmented Dickey-

y, = Y, - ' - bt, where a and b are the OLS estimators

Fuller approach for WS estimation. When the order of the

process is unknown, we approximate the model by an AR

which a linear trend is included in the fitted model. Let

obtained by regressing Y, on 1 and t. If yt is used in (3.1),

then the limiting distribution of the pivotal statistic ws,p,t, for

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456 Journal of Business & Economic Statistics, October 1994

n=25, Y1 -Stationary n=50, Y1 -Stationary

o

O
o
o

O
,
r

T-\

0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
rho

rho

n= 00,Yof Piv1 otalStationary n=250,Ys Generated From N[1 OLS; .........WLStationary; -----o

oo

"1

OLS
S--- GLS

0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
rho

rho

Figure 2. Powers of Pivotal Statistics When Y1 Is Generated From N[O,(1 -p2)-'J: OLS;.......... WLS; .-...., GLS.
where

testing 01 = 1, is

K = 2 tw(t)dt - w(t)dt.

[G- H2 - 3K2] -1/2

x [( - 3TK - HT - 12HK + 2H2 - G + 12K2], (3.2)

See Fuller (1992). We have considered test statistics based

on alternative estimators of (a, b) and found little diference in

the powers. For example, using the estimated GLS estimators

of (a, b), or including the intercept and trend directly in the

WS squares regression, did not lead to an improvement in

Table 7. Data Array for Construction of Weighted
Symmetric Regression

the power relative to the use of the OLS estimator of trend.

Hence only results based on OLS estimators of (a, b) are

presented.

Dependent

Weight variable O1 02 ... OP

Wp+I Yp+i Yp Z ... 22

Wp+2 Yp+2 Yp+l Zp+l ... Z3

Wn-p Yn Yn-1 Zn-1 ... Zn-p+I

1- w2 Y, Y2 -Z3 . Zp+I

1 - w3 Y2 Y3 -Z4 ... -Zp+2

1 - Wn-p+l Yn-p Yn-p+l -Zn-p+2 ... -Zn

3.3 Power Study for Extensions

In this power study, we compare oLS,p and ws, when the
order of the underlying process is unknown. We consider
both the cases in which an intercept is included and those in
which an intercept and trend are included in the alternative
model. The subscripts t and r are used to identify the mean-

adjusted and trend-adjusted cases, respectively. For each

method, the order p between 1 and 10 with the smallest AIC

is determined. Then' = min(AIC +2, 10) is used as the order

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Pantula, Gonzalez-Farias, and Fuller: A Comparison of Unit-Root Test Criteria 457

Table 8. Empirical 5% Percentiles for the Pivotal Statistics When

where et ' NID(O, 1); p = 1, .95, .90, .80, .70; = -.5,.5; 0

Statistic

generated from the stationary distributions so that the process

the Order is Estimated

OLS,p,A,

Tws,p,IA

= -.5, .5. For the cases IpI < 1, the initial observations are

100

-2.89

-2.60

oo

is stationary. For the cases in which p = 1, a corresponding

-2.86

stationary process Xt(= Yt - Yt-1) is generated for t > 1 and

Yt then is computed as i=, Xi. Empirical powers, based on
1,000 replications, are summarized in Table 9. We plot the
empirical powers in Figure 3.

-2.50

IOLS,p,r -3.46 -3.41

rws,p,r -3.36 -3.19

From Table 9, we observe the following:

1. The WS procedure has power uniformly higher than

that of OLS. The gain in power is greater in the mean case

of the process. Note thatpoLs may be different fromws. We

report results for sample size n = 100.

than in the trend case.

We first constructed empirical percentiles for the test statis-

2. Comparing the power for the AR(1) case with those

tics by generating 20,000 samples of size n = 100 from the

given in Table 5, we see that there is a significant loss in power

model (2.1) and then computing the empirical percentiles

due to estimating a long order process. We have observed a

of the different test statistics for the set of 20,000 samples.

The empirical percentiles for the mean and the trend cases are

similar loss in power in the AR(2) case whenp is estimated as

opposed to using p = 2. See also Park and Fuller (1993). The

summarized in Table 8. These empirical percentiles take into

account the fact that p is estimated and hence are different

power for the AR processes increases if we use PAIC instead

of PAMC + 2. With PAIC, however, the size of the test for the

from those given in Table 2. The last column, for the infinite

ARMA models was greater than the nominal level.

3. Even with PAIC + 2, the level of both test criteria are

case, contains entries from Table 2.

To study the power, we consider both AR and mixed models. The models are:

much higher than the nominal level for the trend case when

the MA parameter is .5. Similar results were observed by

Elliott et. al. (1992) and Elliott (1993).

1. AR(1)-- Yt = PYt-1 + et, t > 2,

2. AR(2)- Yt = PYt-1 + qYt-1 - Yr-2 + et, t > 3,

4. For the mean case, the average of fOLS is 3.8 for

the AR(1) model, 4.7 for both AR(2) cases, 5.6 for the

3. ARMA(1, I)-- Y, = pYt-,_1 + et - Oet-l, t > 2,

Table 9. Empirical Power of the OLS and ws Pivotal Statistics (n = 100)

Mean case Trend case

Model P TOLS,p,AA Tws3,p,/ TOLS,p,r Tws,p,r

AR(1)

1.00

5.8

5.3

5.4

4.6

.95 10.8 20.7 9.2 8.8

.90 23.9 47.4 14.7 16.6
.80 68.2 84.7 43.1 51.6
.70 87.5 94.1 69.6 73.4

AR(2)
=

-.5

.5

1.00 5.5 4.6 4.8 4.5

.95
8.9
19.5
6.5
6.6
.90 21.4 41.0 12.9 16.2
.80 63.9 81.6 40.0 45.2
.70 87.5 93.6 68.6 75.5

1.00

5.8

.95 7.9
.90 17.9
.80 44.7
.70 65.8

5.5

5.0

4.5

18.4 5.7 6.1

38.3 11.5 13.3
70.4 25.9 36.4
86.1 43.0 55.1

ARMA(1, 1)

-.5 1.00 4.5 5.4 5.8 5.8

.95 8.9 19.5 7.1 7.8
.90 20.4 41.5 13.8 16.8
.80 48.7 69.9 29.5 36.4
.70

=.5

71.4

1.00 6.0
.95 16.0
.90 39.2
.80 83.2
.70 94.3

85.8

6.8
24.8
51.4
85.8
94.6

48.2

57.2

10.7
14.7
26.8
69.1
89.4

15.0
30.5
67.3
88.8

9.9

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458 Journal of Business & Economic Statistics, October 1994

AR(1)

AR(2)

Phi=-0.5

o.

0.70 0.75 0.80 0.85 0.90 0.95 1.00 0.70 0.75 0.80 0.85 0.90 0.95 1.00
rho

rho

AR(2.) Phi=0.5 ARMA Theta=-0.5

1".

0o

"'.

'

o?.

'

....

OLSmn

WLSmn
"""OLSt

to

- WLSt

0.70

0.75

0.80

0.85

0.90

0.95

1.00

rho

0.70

0.75

0.80

0.85

0.90

0.95

1.00

rho

Figure 3. Powers of Pivotal Statistics in Higher Order Processes for Both the Mean and the Trend Cases. Sample size is 100. OLSmn

= TOLS,p,, (- ); WLSmn = ws,p, (........); OLSt = OLS,pA, (-. ); WLSt = ws,p,(- -).
ARMA(1,1) model with 0 = .5, and 4.8 for the ARMA(1, 1)

whose term is between 27 days and 31 days, depending on

model with q = -.5. The average ofws, is 3.9 for the AR(1)
model, 4.8 for the two AR(2) cases, 5.8 for the ARMA(1, 1)
model with 0 = .5, and 4.9 for the ARMA(1,1) model with

the day of the week. In particular, for our Friday series, the
buyer of the bill on Friday would normally take delivery the

0 = -.5.

bill rate is most precisely characterized as a four-day forward

subsequent Tuesday. Hence our Friday one-month treasury

rate for a 30-day investment" (p. 16).

4. EXAMPLE

To illustrate the test criteria, we analyze the one-month

treasury-bill rate (Yt) measured weekly on Fridays. The

sample period is Friday, January 3, 1975, to Friday,
December 28, 1990. The data were analyzed by Bansal,
Gallant, Hussey, and Tauchen (1992). Those authors stated,
"The one month treasury bill rate was obtained from the Fed-

eral Reserve Board. This rate, which is calculated on a daily

basis, is computed from the average price in the secondary
market for the treasury bill that matures four weeks from the

next Thursday. The price is the average from five dealers of

the bid prices at approximately 4 p.m. Eastern time. Because
there is a two business-day settlement period in the secondary

Because large variability in Y, seems to be associated with

large values of Yt, we analyze Yt = log Y,. The results for

Yt are similar in nature and are not reported. Using an upTable 10. Test Statistics or Treasury-Bill Rate With Different
Orders of Autoregressive Fit

7TOLS,

7w,

-2.49

-2.67

-2.56

-2.75

10

-2.44

-2.64

15

-2.02

-2.23

20

-1.76

-1.99

30

-1.60

-1.84

39

-1.61

-1.89

market, this rate is actually a forward rate on an investment

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Pantula, Gonzalez-Farias, and Fuller: A Comparison of Unit-Root Test Criteria 459

per bound of 40 for the order of an AR process, the AIC +2

criterion selected POLS = Pw, = 39. Because we have 834

observations, we use the critical values from the limiting dis-

technical report, Duke University. Dept. of Economics.

Chan, N. H. (1988), "The Parametric Inference for Nearly Nonstationary

Time Series'" Journal of the American Statistical Association, 83, 857862.

tribution of oLS,, and 'ws,,. The 5% critical values for os,,

and ws,, are -2.86 and -2.50, respectively. Moreover, the

Chan, N. H., and Wei, C. Z. (1987), "Asymptotic Inference for Nearly

Nonstationary AR(1) Process'," The Annals of Statistics, 15, 1050-

results are summarized in Table 10. If we fit an AR process

of order < 10, the WS test statistic rejects the unit-root hy-

Dickey, D. A., and Fuller, W. A. (1979), "Distribution of Estimators for

10% critical values are -2.57 and -2.25, respectively. The

pothesis at the 5% level. For orders greater than or equal to

1063.

Autoregressive Time Series With a Unit Root'," Journal of the American

Statistical Association, 74, 427-431.

15, the WS test fails to reject at the 10% level. The OLS

(1981), "Likelihood Ratio Tests for Autoregressive Time Series With a Unit
Root," Econometrica, 49, 1057-1072.

test fails to reject the unit root at the 10% level for all of the

Dickey, D. A., and Gonzalez-Farias, G. (1992), "A New Maximum Likeli-

orders we considered. As the number of lags increases, the

test criteria decline in absolute value for p > 5.
5. SUMMARY
We have discussed criteria for testing the null hypothesis
of a unit root in a first-order AR process. Based on our simulation study, it is clear that the OLS criteria are the least powerful of the statistics studied. The criteria suggested by Elliott

et al. (1992) are very powerful under the model in which the
initial observations is N(0, a2) but are not the most powerful
against the alternative in which the process is a stationary AR

process with parameter less than 1 in absolute value.

We feel that there are a modest number of situations in
which one is willing to assume that the first observation has

variance equal to the residual variance. For the model in

which the alternative is a stationary process, the criteria based
on the unconditional likelihood and those based on the WS

estimator are the most powerful. These tests also have good
power when the first observation is N(O, cr2). Hence they are

the recommended test statistics for general use.

ACKNOWLEDGMENTS
We thank David Dickey, an associate editor, and the editor
for their comments. We are grateful to Cheng Su for helping

hood Approach to Testing for Unit Roots," unpublished paper presented

at the 1992 Joint Statistical Meetings, August 9-13, Boston.
Dickey, D. A., Hasza, D. P., and Fuller, W. A. (1984), "Testing for Unit Roots
in Seasonal Time Series," Journal of the American Statistical Association,

79, 355-367.

Diebold, F. X., and Nerlove, M. (1989), "Unit Roots in Economic Time

Series: A Selective Survey," inAdvances in Econometrics: Cointegration,
Spurious Regression and Unit Roots, eds. T. B. Fomby and G. F. Rhodes,

Greenwich, CT: JAI Press, pp. 3-70.

Elliott, G. (1993), "Efficient Tests for a Unit Root When the Initial Observation Is Drawn From its Unconditional Distribution," technical report,
Harvard University, Dept. of Economics.
Elliott, G., Rothenberg, T. J., and Stock, J. H. (1992), "Efficient Tests for an

Autoregressive Unit Root:' unpublished paper presented at the NBERNSF Time Series Seminar, October 31, Chicago.
Elliott, G., and Stock, J. H. (1992), "Efficient Tests for an Autoregressive
Unit Root," unpublished paper, presented at the 1992 Joint Statistical

Meetings, August, 9-13, Boston.

Fuller, W. A. (1976), Introduction to Statistical Time Series, New York: John

Wiley.

- (1992), "Weighted Symmetric Estimators," unpublished notes, Iowa

State University, Dept. of Statistics.

Gonzalez-Farias, G. M. (1992), "A New Unit Root Test for Autoregressive

Time Series," unpublished Ph.D. thesis, North Carolina State University,
Dept. of Statistics.
Hasza, D. P. (1980), "A Note on Maximum Likelihood Estimation for the
First Order Autoregressive Process," Communications in Statistics, Part
A-Theory and Methods, 9, 1411-1415.
Hwang, J., and Schmidt, P. (1993), "Alternative Methods of Detrending and

the Power of Unit Root Tests," unpublished manuscript, Michigan State

University, Dept. of Economics.

us with the figures. This research is partly supported by

the cooperative agreement 43-3AEU-3-80088 with National
Agricultural Statistics Service and the Bureau of the Census.

Park, H. J., and Fuller, W. A. (1993), " Alternative Estimators for the Pa-

[Received December 1992. Revised January 1994. ]

Phillips, P. C. B., and Perron, P. (1988), 'Testing for a Unit Root in a Time

REFERENCES

Said, S. E., and Dickey, D. A. (1984), "Testing for Unit Roots in

rameters of the Autoregressive Process," unpublished manuscript, Iowa

State University, Dept. of Statistics.

Series Regression," Biometrika, 75, 335-346.

Bansal, R., Gallant, A. R., Hussey, R., and Tauchen, G. (1992), "Nonparametric Estimation of Structural Models for High-Frequency Market Data,"

Autoregressive-Moving Average Models of Unknown Order," Biometrika,

71,599-608.

SAS (1985), SAS Basics User Guide (Version 5), Cary, NC: SAS Institute.

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