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A complementary test for ADF test with an application to the exchange rates returns

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  • Liew, Venus Khim-Sen
  • Lau, Sie-Hoe
  • Ling, Siew-Eng

Abstract

This study shows that augmented Dickey-Fuller (ADF) test failed to detect covariance nonstationary series. Supportive of Ahamada (2004), this study finds that the cumulative sums of squares procedure in Inclán and Tiao (1994) is useful to complement the ADF test. As illustration, the ADF test indicates that there is no unit root in the returns of Japanese yen/US dollar, British pound/ US dollar and Swiss franc/US. However, the complementary test reveals that each of these returns contains heterogeneous variance. To sum, it can be concluded that these exchange rate returns are covariance nonstationary although there is no unit root.

Suggested Citation

  • Liew, Venus Khim-Sen & Lau, Sie-Hoe & Ling, Siew-Eng, 2005. "A complementary test for ADF test with an application to the exchange rates returns," MPRA Paper 518, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:518
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    References listed on IDEAS

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    1. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    2. Ahamada Ibrahim, 2004. "A complementary test for the KPSS test with an application to the US Dollar/Euro exchange rate," Economics Bulletin, AccessEcon, vol. 3(4), pages 1-5.
    3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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