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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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Author Info
Bent Nielsen
J. James Reade

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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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Publisher Info
Article provided by Taylor and 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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References listed on IDEAS
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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. [Downloadable!]
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  2. Nielsen, Bent, 2001. "The Asymptotic Distribution of Unit Root Tests of Unstable Autoregressive Processes," Econometrica, Econometric Society, vol. 69(1), pages 211-19, January.
  3. Nielsen, Bent, 2005. "Strong Consistency Results For Least Squares Estimators In General Vector Autoregressions With Deterministic Terms," Econometric Theory, Cambridge University Press, vol. 21(03), pages 534-561, June. [Downloadable!]
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