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The Great Crash, the Oil Prices and the Unit Root Hypothesis

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  • Perron, P.

Abstract

We Consider the Null Hypothesis That a Time Series Has a Unit Root with Possibly Non-Zero Drift Against the Alternative That the Process Is 'Trend-Stationary'. the Interest Is That We Allow Under Both the Null and Alternative Hypotheses for the Presence of a One-Time Change in the Level Or in the Slope of the Trend Function. We Show How Standard Tests of the Unit Root Hypothesis Against Trend Stationary Alternatives Cannot Reject the Unit Root Hypothesis If the True Data Generating Mechanism Is That of Stationay Fluctuations Around a Trend Function Which Contains a One-Time Break. This Holds Even Asymptotically. We Derive Test Statistics Which Allow Us to Distinguish the Two Hypotheses When a Break Is Present. Their Limiting Distribution Is Established and Selected Percentage Points Are Tabulated. We Apply These Tests to the Nelson-Plosser Data Set. the Break Is Due to the 1929 Crash and Takes the Form of a Sudden Change in the Level of the Series. for 11 Out of the 14 Series Analysed by Nelson and Plosser We Can Reject At a High Confidence Level the Unit Root Hypothesis. a Similar Rejection Occurs Considering the Post-War Quaterly Real Gnp Series When We Allow a Break in the Trend Function Taking the Form of a Change in the Slope After 1973. Most Macroeconomic Time Series Are Not Characterized by the Presence of a Unit Root Fluctuations Are Indeed Stationary Around a Deterministic Trend Function. the Only 'Shocks' Which Have Had Persistent Effects Are the 1929 Crash and the 1973 Oil Price Shock.

Suggested Citation

  • Perron, P., 1987. "The Great Crash, the Oil Prices and the Unit Root Hypothesis," Cahiers de recherche 8749, Universite de Montreal, Departement de sciences economiques.
  • Handle: RePEc:mtl:montde:8749
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    Cited by:

    1. Erkin Bairam & Lawrence Ng, 2001. "Thirlwall's Law and the Stability of Export and Import Income Elasticities," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 287-303.
    2. Kim, Chang-Jin & Piger, Jeremy, 2002. "Common stochastic trends, common cycles, and asymmetry in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1189-1211, September.
    3. Bertrand Candelon & Luis A. Gil-Alana, 2004. "Fractional integration and business cycle features," Empirical Economics, Springer, vol. 29(2), pages 343-359, May.
    4. Chang-Jin Kim & Jeremy M. Piger & Richard Startz, 2007. "The Dynamic Relationship between Permanent and Transitory Components of U.S. Business Cycles," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 187-204, February.
    5. Bentzen, Jan & Smith, Valdemar, 2002. "An empirical analysis of the effect of labour market characteristics on marital dissolution rates," Working Papers 02-14, University of Aarhus, Aarhus School of Business, Department of Economics.
    6. Chang-Jin Kim & Jeremy M. Piger & Richard Startz, 2001. "Permanent and transitory components of business cycles: their relative importance and dynamic relationship," International Finance Discussion Papers 703, Board of Governors of the Federal Reserve System (U.S.).
    7. B. da Silva Lopes, Artur C., 2005. "Finite sample effects of pure seasonal mean shifts on Dickey-Fuller tests," MPRA Paper 125, University Library of Munich, Germany, revised May 2006.
    8. Christian Richter & Andrew Hughes Hallett, 2005. "A Time-Frequency Analysis of the Coherences of the US Business," Computing in Economics and Finance 2005 45, Society for Computational Economics.

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    Keywords

    Structural Change ; Research Methods;

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