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Asymptotic Expansions for Random Walks with Normal Errors

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  • Knight, J.L.
  • Satchell, S.E.

Abstract

The asymptotic distribution of the least-squares estimators in the random walk model was first found by White [17] and is described in terms of functional of Brownian motion with no closed form expression known. Evans and Savin [5,6] and others have examined numerically both the asymptotic and finite sample distribution. The purpose of this paper is to derive an asymptotic expansion for the distribution. Our approach is in contrast to Phillips [12,13] who has already derived some terms in a general expansion by analyzing the functionals. We proceed by assuming that the errors are normally distributed and expand the characteristic function directly. Then, via numerical integration, we invert the characteristic function to find the distribution. The approximation is shown to be extremely accurate for all sample sizes ≥25, and can be used to construct simple tests for the presence of a unit root in a univariate time series model. This could have useful applications in applied economics.

Suggested Citation

  • Knight, J.L. & Satchell, S.E., 1993. "Asymptotic Expansions for Random Walks with Normal Errors," Econometric Theory, Cambridge University Press, vol. 9(03), pages 363-376, June.
  • Handle: RePEc:cup:etheor:v:9:y:1993:i:03:p:363-376_00
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    Cited by:

    1. Bruce E. Hansen, 1999. "The Grid Bootstrap And The Autoregressive Model," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 594-607, November.
    2. GONZALO , Jesus & PITARAKIS , Jean-Yves, 1995. "On the Exact Moments of Non-Standard Asymptotic Distributions in Non Stationary Autoregressions with Dependent Errors," CORE Discussion Papers 1995034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Jensen, J. L. & Wood, Andrew T. A., 1997. "On the non-existence of a Bartlett correction for unit root tests," Statistics & Probability Letters, Elsevier, vol. 35(2), pages 181-187, September.
    4. Pierre Perron & Cosme Vodounou, 2001. "Asymptotic approximations in the near-integrated model with a non-zero initial condition," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-42.
    5. Mukhtar Ali, 2002. "Distribution Of The Least Squares Estimator In A First-Order Autoregressive Model," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 89-119.

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