BAYESIAN UNIT ROOT TESTING: THE EFFECT OF CHOICE OF PRIOR ON TEST OUTCOMES

Charley Xia and William Griffiths
Authors registered in the RePEc Author Service: William Edward Griffiths ()

No 1152, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: A Monte Carlo experiment is used to examine the size and power properties of alternative Bayesian tests for unit roots. Four different prior distributions for the root that is potentially unity – a uniform prior and priors attributable to Jeffreys, Lubrano, and Berger and Yang – are used in conjunction with two testing procedures: a credible interval test and a Bayes factor test. Two extensions are also considered: a test based on model averaging with different priors and a test with a hierarchical prior for a hyperparameter. The tests are applied to both trending and non-trending series. Our results favor the use of a prior suggested by Lubrano. Outcomes from applying the tests to some Australian macroeconomic time series are presented.

Keywords: N/A (search for similar items in EconPapers)
Pages: 36 pages
Date: 2012
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (2)

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