Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels
AbstractThis paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement under a symmetric loss function, are found to be much higher than conventional ones. We also propose simple calibration rules for the decision-based significance levels for a range of unit root tests. At the decision-based significance levels, many time series in Nelson and Plosser’s (1982) (extended) data set are judged to be trend-stationary, including real income variables, employment variables and money stock. We also find that nearly all real exchange rates covered in Elliott and Pesavento’s (2006) study are stationary; and that most of the real interest rates covered in Rapach and Weber’s (2004) study are stationary. In addition, using a specific loss function, the U.S. nominal interest rate is found to be stationary under economically sensible values of relative loss and prior belief for the null hypothesis. View Full-Text
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Kim, J.H.; Choi, I. Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels. Econometrics 2017, 5, 41.
Kim JH, Choi I. Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels. Econometrics. 2017; 5(3):41.Chicago/Turabian Style
Kim, Jae H.; Choi, In. 2017. "Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels." Econometrics 5, no. 3: 41.
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