UNIT ROOT TESTING: A CRITIQUE FROM CHAOS THEORY

Steven Cunningham ()

Review of Financial Economics, 1993, vol. 3, issue 1, 1-18

Abstract: A counter‐example from chaos theory is used to challenge the augmented Dickey‐Fuller (ADF) test and common prewhitening techniques. The ADF test is applied to data constructed from a fully deterministic nonlinear (chaotic) process. The null hypothesis, that a unit root is present, cannot be rejected; “stationarity” is achieved by prewhitening. The largest Lyapunov exponent and the correlation dimension are estimated for the original and conditioned series in efforts to detect the nonlinearity and ascertain information regarding its specification. This is repeated in the presence of additive white noise. In no case is the procedure successful, nor is misspecification avoided. Along the way, the tests for nonlinearity provide evidence in support of the results of Nelson and Plosser (1982), that the removal of deterministic trends from time series that appear to be unit root processes can lead to spurious results.

Date: 1993
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1002/j.1873-5924.1993.tb00569.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:3:y:1993:i:1:p:1-18

Access Statistics for this article

More articles in Review of Financial Economics from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().