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Simulating Properties of the Likelihood Ratio Test for a Unit Root in an Explosive Second-Order Autoregression

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  • Bent Nielsen
  • J. James Reade

Abstract

This paper provides a means of accurately simulating explosive autoregressive processes and uses this method to analyze the distribution of the likelihood ratio test statistic for an explosive second-order autoregressive process of a unit root. While the standard Dickey-Fuller distribution is known to apply in this case, simulations of statistics in the explosive region are beset by the magnitude of the numbers involved, which cause numerical inaccuracies. This has previously constituted a bar on supporting asymptotic results by means of simulation, and analyzing the finite sample properties of tests in the explosive region.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 26 (2007)
Issue (Month): 5 ()
Pages: 487-501

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Handle: RePEc:taf:emetrv:v:26:y:2007:i:5:p:487-501

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Related research

Keywords: Explosive autoregression; Simulation; Unit root test;

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  1. Bent Nielsen, 1995. "Bartlett correction of the unit root test in autoregressive models," Economics Papers 11 & 98., Economics Group, Nuffield College, University of Oxford.
  2. Bent Nielsen, 2003. "Strong consistency results for least squares estimators in general vector autoregressions with deterministic terms," Economics Papers 2003-W23, Economics Group, Nuffield College, University of Oxford.
  3. Nielsen, Bent, 2001. "The Asymptotic Distribution of Unit Root Tests of Unstable Autoregressive Processes," Econometrica, Econometric Society, vol. 69(1), pages 211-19, January.
  4. Bent Nielsen, 2004. "On the Distribution of Likelihood Ratio Test Statistics for Cointegration Rank," Econometric Reviews, Taylor & Francis Journals, vol. 23(1), pages 1-23.
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