Simulating properties of the likelihood ratio test for a unit root in an explosive second order autoregression

Bent Nielsen and J Reade

No 2004-W24, Economics Papers from Economics Group, Nuffield College, University of Oxford

Abstract: This paper provides a means of accurately simulating explosive autoregressive processes, and uses this method to analyse the distribution of the likelihood ratio test statistic for an explosive second order autoregressive process. Nielsen (2001) has shown that for the asymptotic distribution of the likelihood ratio unit root test statistic in a higher order autoregressive model, the assumption that the remaining roots are stationary is unnecessary, and as such the approximating asymptotic distribution for the test in the difference stationary region is valid in the explosive region also. However, simulations of statistics in the explosive region are beset by the magnitude of the numbers involved, which cause numerical inaccuracies, and this has previously constituted a bar on supporting asymptotic results by means of simulation, and analysing the finite sample properties of tests in the explosive region.

Pages: 12 pages
Date: 2004-10-19
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Simulating Properties of the Likelihood Ratio Test for a Unit Root in an Explosive Second-Order Autoregression (2007)
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