The Power of the "Objective" Bayesian Unit-Root Test
AbstractSome 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.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2004-14.
Length: 21 pages
Date of creation: Jul 2004
Date of revision:
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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Find related papers by 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
- F31 - International Economics - - International Finance - - - Foreign Exchange
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-11 (All new papers)
- NEP-ECM-2004-07-17 (Econometrics)
- NEP-ETS-2004-07-11 (Econometric Time Series)
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