‘Objective’ bayesian unit root tests

Gary M. Koop

71 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Statistical Methods and Bayesian Inference Diverse Scientific and Economic Studies

Abstract

Abstract Due to weaknesses in traditional tests, a Bayesian approach is developed to investigate whether unit roots exist in macroeconomic time‐series. Bayesian posterior odds comparing unit root models to stationary and trend‐stationary alternatives are calculated using informative priors. Two classes of reference priors which are informative but require minimal subjective prior input are used. In this sense the Bayesian unit root tests developed here are objective. Bayesian procedures are carried out on the Nelson–Plosser and Shiller data sets as well as on generated data. The conclusion is that the failure of classical procedures to reject the unit root hypothesis is not necessarily proof that a unit root is present with high probability.

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References

1979Distribution of the Estimators for Autoregressive Time Series with a Unit Root 1988Testing for a Unit Root in Time Series Regression 1979Distribution of the Estimators for Autoregressive Time Series With a Unit Root 1982Trends and random walks in macroeconmic time series 1980Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?1984Testing for Unit Roots in Autoregressive-Moving Average Models of Unknown Order 1988Trends and random walks in macroeconomic time series 1986Understanding spurious regressions in econometrics

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2000Testing for integration using evolving trend and seasonals models: A Bayesian approach 1994WHAT MACROECONOMISTS SHOULD KNOW ABOUT UNIT ROOTS 1999Empirical Studies on Exchange Rate Puzzles and Volatility 1994A Decision-Theoretic Analysis of the Unit-Root Hypothesis Using Mixtures of Elliptical Models 1997Testing long-run purchasing power parity with a Bayesian unit root approach: the experience of Canada in the 1950s

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