A BAYESIAN ANALYSIS OF THE UNIT ROOT HYPOTHESIS

P. Schotman and Herman van Dijk

No 272385, Econometric Institute Archives from Erasmus University Rotterdam

Abstract: We propose a posterior odds analysis in order to compare a random walk model with a first-order stationary autoregressive model. We will study in detail the effect of the presence of a constant term representing an unknown mean of the series. Since the unconditional mean is not identifiable under the random walk hypothesis, one must be careful in specifying a reasonable prior for this model. The sampling properties of the posterior odds statistic are compared with such classical test statistics as proposed by Fuller [1976], and by Bhargava [1986]. The results indicate that the posterior odds compare favorably with these classical tests. Empirical results on time series of real exchange rates indicate that a Bayesian analysis can lead to different conclusions concerning the random walk behaviour of real exchange rates.

Keywords: Agricultural and Food Policy; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 47
Date: 1989-07
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:eureia:272385

DOI: 10.22004/ag.econ.272385

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