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

Listed author(s):
  • Perron, P.

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.

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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 8749.

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Length: 46P. pages
Date of creation: 1987
Handle: RePEc:mtl:montde:8749
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