Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels
Jae Kim and
Econometrics, 2017, vol. 5, issue 3, 1-23
This paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement under a symmetric loss function, are found to be much higher than conventional ones. We also propose simple calibration rules for the decision-based significance levels for a range of unit root tests. At the decision-based significance levels, many time series in Nelson and Plosser’s ( 1982 ) (extended) data set are judged to be trend-stationary, including real income variables, employment variables and money stock. We also find that nearly all real exchange rates covered in Elliott and Pesavento’s ( 2006 ) study are stationary; and that most of the real interest rates covered in Rapach and Weber’s ( 2004 ) study are stationary. In addition, using a specific loss function, the U.S. nominal interest rate is found to be stationary under economically sensible values of relative loss and prior belief for the null hypothesis.
Keywords: expected loss; line of enlightened judgement; power of the test; response surface (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:5:y:2017:i:3:p:41-:d:111322
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