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1.1
1.2
Stationarity Tests
=
=
=
=
t + Ct
t1 + t, t iid(0, 2 )
(L) t, t iid(0, 2 )
0
t
X
j=1
j )
(q + 2) +
2
q = 2
q 2 + 4q
1.3
These distributions are functions of standard Brownian motions, and do not have convenient closed
form expressions. Consequently, critical values
must be calculated using simulation methods.
1.4
H1 : || < 1 yt I(0)
The test statistic is
t=1 =
SE()
= least squares estimate
d
)
T (
N (0, (1 2))
1
A
N , (1 2)
T
A
t=0 N (0, 1)
N (1, 0)
T
X
yt1
Z 1
W (r)dr
0
t=1
Z 1
T
X
d
2
T 2
yt1
2
W (r)2dr
0
t=1
Z 1
T
X
d
T 1
yt1t 2
W (r)dW (r)
0
t=1
A Wiener process W () is a continuous-time stochastic process, associating each date r [0, 1] a scalar
random variable W (r) that satisfies:
1. W (0) = 0
1 W (r)2dr 1/2
0
For example,
1
T
X
2
1 =
yt1
yt1t
t=1
t=1
1
T
T
X
X
2
1) = T 2
T (
yt1
T 1
yt1t
t=1
t=1
Z
!1 Z
1
1
d
2
W (r) dr
W (r)dW (r)
0
0
T
X
> qnorm(c(0.01,0.05,0.10))
[1] -2.326 -1.645 -1.282
> qunitroot(c(0.01,0.05,0.10), trend="nc")
[1] -2.565 -1.941 -1.617
The usual one-sided 5% critical value for standard normal is 1.645
The one-sided 5% critical value for the DF distribution
is 1.941
Note: 1.645 is the 9.45% quantile of the DF distribution
1.5
Trend Cases
The trend properties of the data under the alternative hypothesis will determine the form of the
test regression used.
The type of deterministic terms in the test regression will influence the asymptotic distributions of
the unit root test statistics.
1.5.1
This formulation is appropriate for non-trending economic and financial series like interest rates, exchange
rates, and spreads.
1) are computed
The test statistics t=1 and T (
from the above regression. Under H0 : = 1, c =
0 the asymptotic distributions of these test statistics
are influenced by the presence, but not the coecient
value, of the constant in the test regression:
where
R1
(r)dW (r)
W
0
1)
T (
R1
2
0 W (r) dr
R1
W (r)dW (r)
0
t=1 R
1 W (r)2dr 1/2
0
W (r) = W (r)
Z 1
0
W (r)dr
W (r) = 0
1.5.2
where
R1
(r)dW (r)
W
0
1)
T (
R1
2
0 W (r) dr
R1
W (r)dW (r)
0
t=1 R
1 W (r)2dr 1/2
0
Z
1
1
1
The inclusion of a constant and trend in the test regression further shifts the distributions of t=1 and
1) to the left.
T (
> qunitroot(c(0.01,0.05,0.10), trend="ct")
[1] -3.958 -3.410 -3.127
> qunitroot(c(0.01,0.05,0.10), trend="ct",
+
statistic="n")
[1] -29.35 -21.70 -18.24
Note: 1.645 is the 77.52% quantile of the DF distribution!
1.6
Said and Dickey (1984) augment the basic autoregressive unit root test to accommodate general ARMA(p, q) models with unknown orders and
their test is referred to as the augmented DickeyFuller (ADF) test
Basic model
yt = 0Dt + yt1 + ut
(L)ut = (L)t, t WN(0, 2)
The ADF test tests the null hypothesis that a time series yt is I(1) against the alternative that it is I(0), assuming that the dynamics in the data have an ARMA
structure. The ADF test is based on estimating the
test regression
yt = 0Dt + yt1 +
p
X
j ytj + t
j=1
Dt = deterministic terms
ytj captures serial correlation
The ADF t-statistic and normalized bias statistic are
1
ADFt = t=1 =
SE()
1)
T (
ADFn =
1
p
1
Result: ADFt,ADFn have same asymptotic distribu 1) under white noise errors
tions as t=1 and T (
provided p is selected appropriately.
Important results:
p
X
j ytj + t
j=1
= 1
Under the null hypothesis,
yt I(0) = 0.
The ADF t-statistic and normalized bias statistics are
ADFt = t=0 =
SE()
T
ADFn =
1
p
1
and these are equivalent to the previous statistics.