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Bubbles or Volatility: A Markov-Switching Unit Root Test with Regime-Varying Error Variance

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  • Shu-Ping Shi

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Abstract

We demonstrate that the constant variance assumption in the Markov-switching Augmented Dickey-Fuller (ADF) test proposed by Hall, Psaradakis and Sola (1999) may result in the misjudgement of bubbles. Upon relaxing this assumption to allow for regime-varying error variances in the Markov-switching ADF test (referred to as the MSADF-RV test), we revisit the integration properties of the money base, consumer price and exchange rate in Argentina from January 1983 to November 1989. Based on the MSADF-RV test, we observe the occurrence of volatility switches in the exchange rate and the consumer price instead of observing bubbles in these two series as in Hall, Psaradakis and Sola (1999)

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Bibliographic Info

Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2010-524.

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Length: 14 Pages
Date of creation: Jun 2010
Date of revision:
Handle: RePEc:acb:cbeeco:2010-524

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Cited by:
  1. Arora, Vipin & Gomis-Porqueras, Pedro & Shi, Shuping, 2013. "The divergence between core and headline inflation: Implications for consumers’ inflation expectations," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 497-504.

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