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k=m
Q=
i=k=1
E.g.
LAG
1
2
3
4
5
^p2k
AC
0.9985
0.9970
0.9954
0.9939
0.9924
PAC
1.0001
-0.0021
0.0009
0.0169
-0.0516
Q
Prob
2350.9 0.0000
4695.7 0.0000
7034.2 0.0000
9366.6 0.0000
11693 0.0000
Regress the differences of the log of exchange rate on the trend variable and
the on-period lagged balue of the exchange rate.
In the unit root context, the null hypothesis is Y contains a unit root
The alternative hypothesis is Y is stationary.
Use the DF test, whose critical values are calculated by simulations and
modern stat packages, such as EVIEWS and STATA.
DF test requires a comparison of the Z(t) stat to the critical values, it must be
lower the DF critical values.
If absolute test statistic of 3 (Z(t)) is less than absolute DF critical value,
indicates nonrejection of the unit root null.
Absolute test stat on 3 (Z(t)) is 0.17, which is less than absolute DF critical
value (1%) 3.43. Hence, we can accept the null hypothesis that LEX does
contain a unit root.
DF test can be performed in three different forms:
B 3 , the coefficient of
Y t1 , is zero.
Y t =B3 Y t 1+ ut
Random Walk:
Y t =B1+ B3 Y t 1 +ut
Y t =B1+ B2 t+ B3 Y t 1 +ut
The simple DF test is only valid if the series is an AR(1) process. If the series
is correlated at higher order lags, the assumption disturbances
ut
is
violated.
ADF (augmented dickey-fuller) tests constructs a parametric correction for
higher-order correlation by assuming that the series follows an AR (p) process
and adding p lagged differences terms of the dependent variable (Y) to the
right hand side of the test regression.
If the error term ut is correlated, use ADF.
Add the lagged values of the dependent variables aka
m
Y t =B1+ B2 t+ B3 Y t 1 + ai Y ti +e t
i=0
~t =t 0
a
a
f0
Where the
1/ 2
( )
a^
T ( f 0 0 ) ( se ( a^ ) )
2f 0
1 /2
coefficient standard error, and the s is the standard error of the test
regression, In addition, 0 is consistent estimate of the error variance, f0 is
an estimator of the residual spectrum at frequency zero.
There are two choices you will have make when performing the PP test:
First, you must choose whether to include a constant, a constant a linear line
trend, or neither in the test regression.
Second, you will have to choose a method for estimating f0. Stata and Eviews
has estimators to estimate this.
PP test with trend. Null and alternative hypotheses are same as ADF test. PP
test shows Y is a unit root variable.
If there is a general trend you can make it stationary by removing the trend
from it.
Yt = A1+A2t+et, where t is trend variable and e is error term with the usual
properties.
e^ =Y t A1 A 2 t
The estimated error term in the above equation now represents the
detrended Y time series i.e. Y without the trend.
This procedure is valid if the original Y has a deterministic trend. If the time
series becomes stationary after detrending then it is called trend stationary.
Taking the first difference Y is a better way to make it stationary.