Bayesian Unit Root Testing: The Effect of Choice of Prior on Test Outcomes

Charley Xia and William Griffiths

A chapter in 30th Anniversary Edition, 2012, pp 27-57 from Emerald Group Publishing Limited

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: Test size and power; Monte Carlo simulation; model averaging; hierarchical prior (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(2012)0000030007

DOI: 10.1108/S0731-9053(2012)0000030007

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