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Testing for Integration using Evolving Trend and Seasonals Models: A Bayesian Approach

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Author Info

  • Gary Koop

    (University of Edinburgh)

  • Herman K. van Dijk

    () (Erasmus University Rotterdam)

Abstract

In this paper, we make use of state space models to investigate the presence of stochastic trends in economic time series. A model is specified where such a trend can enter either in the autoregressive representation or in a separate state equation. Tests based on the former are analogous to Dickey-Fuller tests of unit roots, while the latter are analogous to KPSS tests of trend-stationarity. We use Bayesian methods to survey the properties of the likelihood function in such models and to calculate posterior odds ratios comparing models with and without stochastic trends. We extend these ideas to the problem of testing for integration at seasonal frequencies and show how our techniques can be used to carry out Bayesian variants of either the HEGY or Canova-Hansen test. Stochastic integration rules, based on Markov Chain Monte Carlo, as well as deterministic integration rules are used. Strengths and weaknesses of each approach are indicated.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-072/4.

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Date of creation: 21 Sep 1999
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Handle: RePEc:dgr:uvatin:19990072

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Web page: http://www.tinbergen.nl

Related research

Keywords: State space models; Bayes Factor; Gibbs sampler; unit root; seasonality;

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References

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  1. Koop, Gary & Potter, Simon M, 1999. "Dynamic Asymmetries in U.S. Unemployment," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(3), pages 298-312, July.
  2. Chib, Siddhartha & Greenberg, Edward, 1994. "Bayes inference in regression models with ARMA (p, q) errors," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 183-206.
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  7. Bos, C.S. & Mahieu, R.J. & Dijk, H.K. van, 2000. "Daily exchange rate behaviour and hedging of currency risk," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3131740, Tilburg University.
  8. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238.
  9. Stock, James H & Watson, Mark W, 1988. "Variable Trends in Economic Time Series," Journal of Economic Perspectives, American Economic Association, vol. 2(3), pages 147-74, Summer.
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  11. Ghysels, E. & Harvey, A. & Renault, E., 1996. "Stochastic Volatility," Cahiers de recherche 9613, Universite de Montreal, Departement de sciences economiques.
  12. Min, Chung-ki & Zellner, Arnold, 1993. "Bayesian and non-Bayesian methods for combining models and forecasts with applications to forecasting international growth rates," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 89-118, March.
  13. Hylleberg, S. & Pagan, A. R., 1997. "Seasonal integration and the evolving seasonals model," International Journal of Forecasting, Elsevier, vol. 13(3), pages 329-340, September.
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  15. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  16. repec:fth:erroem:9936/a is not listed on IDEAS
  17. Canova, Fabio & Hansen, Bruce E, 1995. "Are Seasonal Patterns Constant over Time? A Test for Seasonal Stability," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 237-52, July.
  18. Gary Koop & Simon M. Potter, 1999. "Are apparent findings of nonlinearity due to structural instability in economic time series?," Staff Reports 59, Federal Reserve Bank of New York.
  19. Dijk, H.K. & Schotman, P., 1991. "On Bayesian routes to unit roots," Open Access publications from Maastricht University urn:nbn:nl:ui:27-5928, Maastricht University.
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  22. John Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report 249, Federal Reserve Bank of Minneapolis.
  23. Shephard, Neil, 1993. "Distribution of the ML Estimator of an MA(1) and a local level model," Econometric Theory, Cambridge University Press, vol. 9(03), pages 377-401, June.
  24. Schotman, Peter C., 1994. "Priors For The Ar(1) Model: Parameterization Issues and Time Series Considerations," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 579-595, August.
  25. Kato, Hiroko & Naniwa, Sadao & Ishiguro, Makio, 1996. "A bayesian multivariate nonstationary time series model for estimating mutual relationships among variables," Journal of Econometrics, Elsevier, vol. 75(1), pages 147-161, November.
  26. Schotman, Peter & van Dijk, Herman K., 1991. "A Bayesian analysis of the unit root in real exchange rates," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 195-238.
  27. Schotman, Peter C & van Dijk, Herman K, 1991. "On Bayesian Routes to Unit Roots," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(4), pages 387-401, Oct.-Dec..
  28. Shively, Thomas S. & Kohn, Robert, 1997. "A Bayesian approach to model selection in stochastic coefficient regression models and structural time series models," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 39-52.
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