Simulating Properties of the Likelihood Ratio Test for a Unit Root in an Explosive Second-Order Autoregression

Bent Nielsen and J Reade

Econometric Reviews, 2007, vol. 26, issue 5, 487-501

Abstract: This paper provides a means of accurately simulating explosive autoregressive processes and uses this method to analyze the distribution of the likelihood ratio test statistic for an explosive second-order autoregressive process of a unit root. While the standard Dickey-Fuller distribution is known to apply in this case, simulations of statistics in the explosive region are beset by the magnitude of the numbers involved, which cause numerical inaccuracies. This has previously constituted a bar on supporting asymptotic results by means of simulation, and analyzing the finite sample properties of tests in the explosive region.

Keywords: Explosive autoregression; Simulation; Unit root test (search for similar items in EconPapers)
Date: 2007
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Working Paper: Simulating properties of the likelihood ratio test for a unit root in an explosive second order autoregression (2004)
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DOI: 10.1080/07474930701512055

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