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Econometrics 2017, 5(3), 41; doi:10.3390/econometrics5030041

Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels

1
Department of Economics and Finance, La Trobe University, Melbourne VIC 3086, Australia
2
Department of Economics, Sogang University, Seoul 04107, Korea
*
Author to whom correspondence should be addressed.
Academic Editors: Federico Bandi, Alex Maynard, Hyungsik Roger Moon and Benoit Perron
Received: 10 February 2017 / Revised: 14 August 2017 / Accepted: 29 August 2017 / Published: 8 September 2017
(This article belongs to the Special Issue Celebrated Econometricians: Peter Phillips)
View Full-Text   |   Download PDF [1095 KB, uploaded 8 September 2017]   |  

Abstract

This 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
Keywords: expected loss; line of enlightened judgement; power of the test; response surface expected loss; line of enlightened judgement; power of the test; response surface
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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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.

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