SSE/EFI Working Paper Series in Economics and Finance
No 546:
Testing the unit root hypothesis against the logistic smooth transition autoregressive model
Bruno Eklund ()
Abstract: In this paper two simple tests to distinguish between unit
root processes and stationary nonlinear processes are proposed. New limit
distribution results are provided, together with two F type test statistics
for the joint unit root and linearity hypothesis against a specific
nonlinear alternative. Nonlinearity is defined through the smooth
transition autoregressive model. Due to occasional size distortion in small
samples, a simple bootstrap method is proposed for estimating the p-values
of the tests. Power simulations show that the two proposed tests have at
least the same or higher power than the corresponding Dickey-Fuller tests.
Finally, as an example, the tests are applied on the seasonally adjusted
U.S. monthly unemployment rate. The linear unit root hypothesis is strongly
rejected, showing considerable evidence that the series is better described
by a stationary smooth transition autoregressive process than a random
walk.
Keywords: Smooth transition autoregressive model; nonlinearity; unit root; Brownian motion; critical values; bootstrap; Monte Carlo simulations; unemployment rate; (follow links to similar papers)
JEL-Codes: C22; C52; (follow links to similar papers)
24 pages, November 28, 2003
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