Unit root test interpretation pdf

How to read unit root test results obtained from eviews. We instead need to use functional central limit theorem. This handout illustrates the steps to carry out unit root tests, johansen cointegration test, granger causality, variance decomposition and impulse response functions. European university institute department of economics eui working paper eco no. The fourth set of options on the righthand side of the dialog consist of testspecific advanced settings. The dfgls unit root test although common practice in time series modelling has involved the application of augmented dickeyfuller and phillipsperron tests to determine whether a series possesses a unit root, improved tests with much better statistical properties are now available. The lower one shows how the eviews runs the regression.

A time series is nonstationary if it contains a unit root unit root. For stationary time series we can apply the usual tools from regression and the interpretation is. So to identify the correct underlying time series model, we must test whether a unit root. Hall and jacques mairesse 1 introduction in this paper, we investigate the properties of several unit root tests in short panel data models using simulated data that look like the data typically encountered in. On the interpretation of panel unit root tests request pdf. How do you interpret results from unit root tests with. Unit root and stationarity test statistics have nonstandard and nonnor mal asymptotic. But remember, it will be a multi step approach here not a single code or click like we do in stata or eviews. The alternate hypothesis is that it is less than zero, i. However, if the presence of a unit root is not rejected, then one should apply the difference operator to the series. Augmented dickeyfuller adf and phillipsperron pp results.

Numerous empirical studies of the dynamics of unemployment rate are carried out within a linear framework. The nonstationary series usually can be eliminated when we difference the series. Breitung and das2005, impesaranshin 2003, and fishertype choi2001 tests have as the null hypothesis that all the panels contain a unit root. For the interpretation of eviews output, just focus on top part. The first part of the unit root output provides information about the form of the test the type of test, the exogenous variables, and lag length used, and contains the test output, associated critical values, and in this case, the pvalue. In other words, the test statistics dont follow t distribution but tau distribution. Weakform efficiency is examined using unit root tests while semistrong form efficiency is tested using co integration, granger causality tests and variance. This tests the null hypothesis that demand follows a unit root process. Click on view and select the unit root test button. Time series analysis and computational finance rdrr. Unit root tests with eviews time series we have discussed how to perform the unit root test, namely adf test, pp test and also dfgls test to test whether our time series data is stationary or not. Unit root test, take home message it is not always easy to tell if a unit root exists because these tests have low power against near unit root alternatives e.

Using regression approach, you can use spss to test unit root test. Phillipsperron pp unit root tests university of bath. Using pperron to test for a unit root in yrwd2 and yt yields a similar conclusion as the adf test output not shown here. In section 3 we survey several alternative tests for the existence of unit roots, ineluding cases where seasonality is present. In this chapter, the technical details of unit root and stationarity tests are kept to a minimum. The null hypothesis is generally defined as the presence of a unit root and the alternative hypothesis is either stationarity, trend stationarity or explosive root depending on the test used. Augmented dickeyfuller adf and phillipsperron pp unit root test are used at level form and first difference of each series. Canovahansen seasonal unit root test one response to the low power of adf tests in the presence of near unit root stationarity was the test of kwiatkowski, phillips, schmidt, and shin 1992 kpss, which is in fact a test for stationarity at the 0frequency alone. The augmented dickeyfuller test the tests above are only valid if u t is white noise.

The most popular stationarity tests are the kitawoskiphillipsschmidtshin kpss test and the leybornemccabe test. Its clear that all series is nonstationary or contained unit root in level form and we need the time series to be stationary. The options are associated with the method used to estimate the zero frequency spectrum term, that is used in constructing the particular test statistic. Given the data, we conduct each test with the stata package. The dickeyfuller df unit root test in an ar1 model duration. Testing for cointegration select the adf test on the test type window.

Many results of traditional statistical theory do not apply to unit root process, such as law of large number and central limit theory. Under the null, the demand follows an unit root process. Section 4 deals with alternative definitions of integration. The augmented dickeyfuller test is a test that determines whether you can conclude from a time series that it is stationary. If economic theory favors a particular null hypothesis, the appropriate case can be chosen based on that. Phillipsperron pp unit root tests the dickeyfuller test involves fitting the regression model. So, we cant use the critical values from tdistribution.

The results of the unit root test are reported in table 5. Afurtherinvestigation jushan bai and serena ng columbia university an effective way to control for crosssection correlation when conducting a panel unit root test is to remove the common factors from the data. The first part of the unit root output provides information about the form of the test the type of test, the exogenous. Problem of unit root and unit root tests posted on january 18, 2014 by noman arshed posted in nomis blog tagged econometrics, unit root since time series dimension developed variables like behavior, organizations and mechanisms were now studied in context of their evolution in time.

Are unemployment rates in oecd countries stationary. Many economic time series are persistent, but is the root 0. As with the adf and pp tests the kpss and leybornemccabe tests di. In this video, it is shown that how to test unit root in the data, how to remove unit root from the data, how to take first difference of data and how to make data stationary. In multivariate frameworks, one can get spurious regression results. The change over the following time unit also distributed as n0,1. This issue is particularly important in applications, because it determines the kind of tools that we should apply to the data. The stationarity or otherwise of a series can strongly influence its behaviour and properties e. In the panel unit root test framework, two generations of tests have been developed. Covariateaugmented unit root tests returning to the dfgls unit root test, we now consider an improved version of that test proposed by elliott and jansson j. Further, as pesaran 2012 notes, the interpretation of panel unit root tests depends on the way in which the alternative hypothesis is specified. Augmented dickeyfuller unit root tests how do we know when to difference time series data to make it stationary.

If the acf is slowly decreasing, roughly at a linear rate, the pacf has a. An exploration using real and simulated data bronwyn h. The solution is to augment the test using p lags of the dependent varibliable. Problem of unit root and unit root tests noman arshed. You must specify four sets of options to carry out a unit root test. In statistics, a unit root test tests whether a time series variable is nonstationary and possesses a unit root. Dickey fuller test using spss a dickeyfuller test is an econometric test used for testing whether a certain kind. Tests for stationarity and stability in timeseries data. The first three settings on the lefthand side of the dialog determine the basic form of the unit root test. You usually reject the null when the pvalue is less than or equal to a specified significance level, often 0. To estimate the slope coefficients, one should first conduct a unit root test, whose null hypothesis is that a unit root is present. Stationarity and unitroot testing why do we need to test for nonstationarity. In this chapter, the technical details of unit root and stationarity tests. The concepts of cointegration and unit roots are introduced in section 2.

As is well known in the applied economics literature, even a test. Stationarity and unit root testing why do we need to test for nonstationarity. The unit root null hypothesis against the stationary alternative corresponds to h0. Unit root tests are useful for selecting forecasting models. To account for this, the augmented dickeyfuller test s regression includes lags of the first differences of yt.

Econometrics, 2003 that adds stationary covariates to gain additional power. The stationarityor otherwise of a series can strongly influence its behaviour and properties e. How to test unit root and remove unit root from data and. The critical values for the dickey fuller unit root test with a constant and linear trend are derived via simulation in the r language. The levin linchu 2002, harristzavalis 1999, breitung 2000. Cointegration and unit roots connecting repositories. Unit root test, augmented dickeyfuller test, phillipsperron test, kpss test, adf gls test. However, there remain many ways to use the defactored residuals to construct a test. If you had chosen to perform any of the other unit root tests pp, kpss, ers, np, the right side of the dialog would show the different options associated with the specified test. In particular, u t will be autocorrelated if there was autocorrelation in the dependent variable of the regression. Rs ec2 lecture 16 1 1 lecture 16 unit root tests a shock is usually used to describe an unexpected change in a. How to interpret the results in an augmented dickeyfuller.

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