Model specification, observational equivalence and performance of unit root tests
AbstractIn this paper we highlight the necessity of new criteria for evaluation of performance of unit root tests. We suggest focusing directly on the reasons that create ambiguity in unit root test’s results. Two reasons for unsatisfactory properties of unit root tests can be found in the literature (i) the model misspecification and (ii) observational equivalence. Regarding first reason, there is immense literature on several components of model specification covering specification techniques, consequence of misspecification and robust methods. However complete model specification involves multiple decisions and most of studies on performance of unit root tests do not address issue of multiple specification decisions simultaneously. The Monte Carlo studies are conditional on some of implicit specification and for Monte Carlo; these specifications are by construction valid. But for real data, the implicit decisions are often not true and specification decisions need to be endogenized. A closer match with real case is possible if multiple specification decisions are endogenized, thus providing more reliable measure of performance of unit root tests. Second problem in differentiating trend and difference stationary process is the observational equivalence between two processes. We suggest exploring data generating processes with different long run dynamics and small sample equivalence so that a researcher should have an idea about other plausible models for a data set for which he has estimated some model.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 13489.
Date of creation: Jul 2008
Date of revision:
Observational equivalence; model specification; trend stationary; difference stationary;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-02-28 (All new papers)
- NEP-ECM-2009-02-28 (Econometrics)
- NEP-ETS-2009-02-28 (Econometric Time Series)
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