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The Power of the "Objective" Bayesian Unit-Root Test

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  • Francis W. Ahking

    (University of Connecticut)

Abstract

Some researchers, for example, Koop (1992), and Sims (1988), advocated for Bayesian alternatives to unit-root testing over the classical approach using the augmented Dickey-Fuller test (ADF). This paper studies the power of what Koop (1992) has called the "Objective" Bayesian approach to unit-root testing. Koop's "objective" Bayesian test is interesting in light of the call by Phillips (1991a, 1991b) for more objective Bayesian analysis of time series. We apply the "objective" Bayesian unit-root test to a study of long-run purchasing power parity (PPP) in the post-Bretton Woods era and also Monte Carlo simulations. Overall, our results suggest that the "objective" Bayesian test is biased in favor of trend-stationarity. We conclude that, at least for the "objective" Bayesian test, it is not better than the classical ADF approach in unit-root tests, and because of its bias, the "objective" priors suggested by Koop is not appropriate.

Suggested Citation

  • Francis W. Ahking, 2004. "The Power of the "Objective" Bayesian Unit-Root Test," Working papers 2004-14, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2004-14
    Note: I wish to thank Professor Stephen M. Miller, participants at the Southern Economic Association Annual Meetings, and Department of Economics, University of Connecticut, brown-bag seminar for comments on an earlier draft of this paper. Remaining errors are my sole responsibilities.
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    References listed on IDEAS

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    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Sims, Christopher A., 1988. "Bayesian skepticism on unit root econometrics," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 463-474.
    3. Caner, M. & Kilian, L., 2001. "Size distortions of tests of the null hypothesis of stationarity: evidence and implications for the PPP debate," Journal of International Money and Finance, Elsevier, vol. 20(5), pages 639-657, October.
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    10. Culver, Sarah E. & Papell, David H., 1999. "Long-run purchasing power parity with short-run data: evidence with a null hypothesis of stationarity," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 751-768, October.
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    Cited by:

    1. Thabo M. Mokoena & Rangan Gupta & Reneé Van Eyden, 2009. "Testing For Ppp Using Sadc Real Exchange Rates," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 351-362, September.
    2. Valeria C. Castellanos, 2008. "Comisiones en cajeros automáticos y su relación con el tamaño de la red en México," Monetaria, CEMLA, vol. 0(1), pages 57-92, enero-mar.
    3. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    4. Yong Li & Jun Yu, 2010. "A New Bayesian Unit Root Test in Stochastic Volatility Models," Working Papers 21-2010, Singapore Management University, School of Economics, revised Oct 2010.
    5. César E. Tamayo & Andrés M. Vargas, 2008. "Flujos de capital y frenazos súbitos: teoría, historia y una nueva estimación," Monetaria, CEMLA, vol. 0(1), pages 27-56, enero-mar.
    6. Yong Li & Jun Yu, 2019. "An Improved Bayesian Unit Root Test in Stochastic Volatility Models," Annals of Economics and Finance, Society for AEF, vol. 20(1), pages 103-122, May.
    7. Enrique Cuervo Guzmán, 2008. "Bayesian analysis of the unit root in real exchange rates: the NAFTA case," Monetaria, CEMLA, vol. 0(1), pages 93-144, enero-mar.
    8. Bibiana Lanzilotta & Adrián Fernández & Gonzalo Zunino, 2008. "Evaluación de las proyecciones de analistas: la encuesta de expectativas de inflación del banco central," Monetaria, CEMLA, vol. 0(1), pages 1-25, enero-mar.

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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