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'Objective' Bayesian Unit Root Tests

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  • Koop, Gary

Abstract

Due to weaknesses in traditional tests a Bayesian approach is developed to investigate whether unit roots exist in macroeconomic time-series. Bayesian posterior odds comparing unit root models to stationary and trend-stationary alternatives are calculated using informative priors. Two classes of reference priors which are informative but require minimal subjective prior input are used. In this sense the Bayesian unit root tests developed here are objective. Bayesian procedures are carried out on the C. Nelson-C. Plosser (1982) and R. Shiller (1981) data sets as well as on generated data. The conclusion is that the failure of classical procedures to reject the unit root hypothesis is not necessarily proof that a unit root is present with high probability. Copyright 1992 by John Wiley & Sons, Ltd.

Suggested Citation

  • Koop, Gary, 1992. "'Objective' Bayesian Unit Root Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(1), pages 65-82, Jan.-Marc.
  • Handle: RePEc:jae:japmet:v:7:y:1992:i:1:p:65-82
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    Cited by:

    1. Koedijk, Kees G. & Tims, Ben & van Dijk, Mathijs A., 2004. "Purchasing power parity and the euro area," Journal of International Money and Finance, Elsevier, vol. 23(7-8), pages 1081-1107.
    2. Grassi, S. & Proietti, T., 2014. "Characterising economic trends by Bayesian stochastic model specification search," Computational Statistics & Data Analysis, Elsevier, pages 359-374.
    3. Cribari-Neto, Francisco, 1993. "Unit roots, random walks and the sources of business cycles: a survey," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 47(3), July.
    4. Tommaso Proietti & Stefano Grassi, 2015. "Stochastic trends and seasonality in economic time series: new evidence from Bayesian stochastic model specification search," Empirical Economics, Springer, pages 983-1011.
    5. Koop, Gary & Dijk, Herman K. Van, 2000. "Testing for integration using evolving trend and seasonals models: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 97(2), pages 261-291, August.
    6. Koedijk, C.G. & Tims, B. & van Dijk, M.A., 2005. "Purchasing Power Parity and Heterogeneous Mean Reversion," ERIM Report Series Research in Management ERS-2005-085-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    7. N. Vijayamohanan Pillai, 2001. "Electricity demand analysis and forecasting: The tradition is questioned," Centre for Development Studies, Trivendrum Working Papers 312, Centre for Development Studies, Trivendrum, India.
    8. Francis W. Ahking, 2004. "The Power of the "Objective" Bayesian Unit-Root Test," Working papers 2004-14, University of Connecticut, Department of Economics.
    9. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1161-x is not listed on IDEAS
    10. N. Vijayamohanan Pillai, 2010. "Electricity Demand Analysis and Forecasting- The Tradition is Questioned," Working Papers id:2966, eSocialSciences.
    11. Francis W. Ahking, 2002. "Is the Bayesian Approach Necessarily Better than the Classical Approach in Unit-Root Test?," Working papers 2002-18, University of Connecticut, Department of Economics.

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