Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels
This paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement...
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doaj-8c041f3072a148528cb1c742950d96b52020-11-25T02:29:16ZengMDPI AGEconometrics2225-11462017-09-01534110.3390/econometrics5030041econometrics5030041Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance LevelsJae H. Kim0In Choi1Department of Economics and Finance, La Trobe University, Melbourne VIC 3086, AustraliaDepartment of Economics, Sogang University, Seoul 04107, KoreaThis paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement under a symmetric loss function, are found to be much higher than conventional ones. We also propose simple calibration rules for the decision-based significance levels for a range of unit root tests. At the decision-based significance levels, many time series in Nelson and Plosser’s (1982) (extended) data set are judged to be trend-stationary, including real income variables, employment variables and money stock. We also find that nearly all real exchange rates covered in Elliott and Pesavento’s (2006) study are stationary; and that most of the real interest rates covered in Rapach and Weber’s (2004) study are stationary. In addition, using a specific loss function, the U.S. nominal interest rate is found to be stationary under economically sensible values of relative loss and prior belief for the null hypothesis.https://www.mdpi.com/2225-1146/5/3/41expected lossline of enlightened judgementpower of the testresponse surface |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Jae H. Kim In Choi |
spellingShingle |
Jae H. Kim In Choi Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels Econometrics expected loss line of enlightened judgement power of the test response surface |
author_facet |
Jae H. Kim In Choi |
author_sort |
Jae H. Kim |
title |
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels |
title_short |
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels |
title_full |
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels |
title_fullStr |
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels |
title_full_unstemmed |
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels |
title_sort |
unit roots in economic and financial time series: a re-evaluation at the decision-based significance levels |
publisher |
MDPI AG |
series |
Econometrics |
issn |
2225-1146 |
publishDate |
2017-09-01 |
description |
This paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement under a symmetric loss function, are found to be much higher than conventional ones. We also propose simple calibration rules for the decision-based significance levels for a range of unit root tests. At the decision-based significance levels, many time series in Nelson and Plosser’s (1982) (extended) data set are judged to be trend-stationary, including real income variables, employment variables and money stock. We also find that nearly all real exchange rates covered in Elliott and Pesavento’s (2006) study are stationary; and that most of the real interest rates covered in Rapach and Weber’s (2004) study are stationary. In addition, using a specific loss function, the U.S. nominal interest rate is found to be stationary under economically sensible values of relative loss and prior belief for the null hypothesis. |
topic |
expected loss line of enlightened judgement power of the test response surface |
url |
https://www.mdpi.com/2225-1146/5/3/41 |
work_keys_str_mv |
AT jaehkim unitrootsineconomicandfinancialtimeseriesareevaluationatthedecisionbasedsignificancelevels AT inchoi unitrootsineconomicandfinancialtimeseriesareevaluationatthedecisionbasedsignificancelevels |
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