A nonlinear alternative to the unit root hypothesis
AbstractThis paper considers testing the unit root hypothesis against a smooth transition autoregressive model as the alternative. The model specification makes it possible to discriminate between nonstationary random walk and stationary nonlinear processes. Some new limit results are presented, extending earlier work, and two F type tests are proposed. Small sample simulations show some size distortions, why a bootstrap method for estimating p-values to the tests are considered. Power simulations show some gain in power, compared to the common Augmented Dickey-Fuller tests. Finally, the two proposed F type tests are applied on a number of real exchange rates. For several of the exchange rates considered the linear unit root is rejected in favor of the stationary nonlinear model, supporting the purchasing power parity hypothesis.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 547.
Length: 23 pages
Date of creation: 28 Nov 2003
Date of revision:
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Smooth transition autoregressive model; nonlinearity; unit root; Brownian motion; bootstrap; critical values; Monte Carlo simulations; real exchange rates;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-14 (All new papers)
- NEP-ECM-2003-12-14 (Econometrics)
- NEP-ETS-2003-12-14 (Econometric Time Series)
- NEP-IFN-2003-12-14 (International Finance)
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