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A nonlinear alternative to the unit root hypothesis

  • Eklund, Bruno

    ()

    (Dept. of Economic Statistics, Stockholm School of Economics)

This paper considers testing the unit root hypothesis against a smooth transition autoregressive model as the alternative. The model specification makes it possible to discriminate between nonstationary random walk and stationary nonlinear processes. Some new limit results are presented, extending earlier work, and two F type tests are proposed. Small sample simulations show some size distortions, why a bootstrap method for estimating p-values to the tests are considered. Power simulations show some gain in power, compared to the common Augmented Dickey-Fuller tests. Finally, the two proposed F type tests are applied on a number of real exchange rates. For several of the exchange rates considered the linear unit root is rejected in favor of the stationary nonlinear model, supporting the purchasing power parity hypothesis.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0547.pdf
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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 547.

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Length: 23 pages
Date of creation: 28 Nov 2003
Date of revision:
Handle: RePEc:hhs:hastef:0547
Contact details of provider: Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
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Web page: http://www.hhs.se/
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  1. Enders, Walter & Granger, C. W. J., 1998. "Unit Root Tests and Asymmetric Adjustment with an Example Using the Term Structure of Interest Rates," Staff General Research Papers 1388, Iowa State University, Department of Economics.
  2. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  3. Mehmet Caner & Bruce E. Hansen, 2001. "Threshold Autoregression with a Unit Root," Econometrica, Econometric Society, vol. 69(6), pages 1555-1596, November.
  4. Eklund, Bruno, 2003. "Testing the unit root hypothesis against the logistic smooth transition autoregressive model," SSE/EFI Working Paper Series in Economics and Finance 546, Stockholm School of Economics.
  5. Hamori, Shigeyuki & Tokihisa, Akira, 1997. "Testing for a unit root in the presence of a variance shift1," Economics Letters, Elsevier, vol. 57(3), pages 245-253, December.
  6. Hansen, Bruce E., 1992. "Convergence to Stochastic Integrals for Dependent Heterogeneous Processes," Econometric Theory, Cambridge University Press, vol. 8(04), pages 489-500, December.
  7. repec:cup:etheor:v:8:y:1992:i:4:p:489-500 is not listed on IDEAS
  8. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
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