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Abstract

A Monte Carlo experiment is used to examine the size and power properties of alternative Bayesian tests for unit roots. Four different prior distributions for the root that is potentially unity – a uniform prior and priors attributable to Jeffreys, Lubrano, and Berger and Yang – are used in conjunction with two testing procedures: a credible interval test and a Bayes factor test. Two extensions are also considered: a test based on model averaging with different priors and a test with a hierarchical prior for a hyperparameter. The tests are applied to both trending and non-trending series. Our results favor the use of a prior suggested by Lubrano. Outcomes from applying the tests to some Australian macroeconomic time series are presented.

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File URL: http://www.economics.unimelb.edu.au/research/1152.pdf
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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1152.

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Length: 36 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mlb:wpaper:1152

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Postal: Department of Economics, The University of Melbourne, 5th Floor, Economics and Commerce Building, Victoria, 3010, Australia
Phone: +61 3 8344 5289
Fax: +61 3 8344 6899
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Web page: http://www.economics.unimelb.edu.au
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Keywords: N/A;

This paper has been announced in the following NEP Reports:

• NEP-ALL-2012-09-09 (All new papers)
• NEP-ECM-2012-09-09 (Econometrics)
• NEP-ETS-2012-09-09 (Econometric Time Series)

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   • Christopher A. Sims, 1988. "Bayesian skepticism on unit root econometrics," Discussion Paper / Institute for Empirical Macroeconomics 3, Federal Reserve Bank of Minneapolis.
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8. Olivier J. Blanchard & Lawrence H. Summers, 1989. "Hysteresis in Unemployment," NBER Working Papers 2035, National Bureau of Economic Research, Inc.
   
   • Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
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12. Berger, James O. & Yang, Ruo-Yong, 1994. "Noninformative Priors and Bayesian Testing for the AR(1) Model," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 461-482, August.
13. 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.
14. DeJong, David N, et al, 1992. "Integration versus Trend Stationarity in Time Series," Econometrica, Econometric Society, vol. 60(2), pages 423-33, March.
15. 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..
    
    • Peter C. Schotman & Herman K. van Dijk, 1991. "On Bayesian routes to unit roots," Discussion Paper / Institute for Empirical Macroeconomics 43, Federal Reserve Bank of Minneapolis.
16. Mayadunne, Geetha & Evans, Merran & Inder, Brett, 1995. "An Empirical Investigation of Shock Persistence in Economic Time Series," The Economic Record, The Economic Society of Australia, vol. 71(213), pages 145-56, June.

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