Limitations and comparison of the DFA, PP, and KPSS unit-root tests: Evidence for laboral market variables in Mexico

Ricardo Rodolfo Retamoza Yocupicio
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Ricardo Rodolfo Retamoza Yocupicio: The National Autonomous University of Mexico

Northern European Stata Conference 2024 from Stata Users Group

Abstract: Unit-root tests have represented a great contribution to time-series analysis by detecting when a variable is stationary or not. However, they present limitations, which, although known, are still used, and it seems that these limitations go unnoticed when applied in time-series studies. Examples of these limitations, mainly Dickey–Fuller (DF) and Phillips–Perron (PP), are that they could be detecting the presence of a unit root when the series does not have it. Consequently, this presentation includes some of the criticisms that have been made to the unit-root tests to consequently execute in Stata the three best-known unit root tests (DFA, PP , and KPSS) for the main macroeconomic variables of Mexico, this with the intention of analyzing, both graphically and technically, whether the series are stationary or not. The main conclusion is that unit-root tests are often more related to statistical than economic issues.

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