SSE/EFI Working Paper Series in Economics and Finance
A nonlinear alternative to the unit root hypothesis
Abstract: This paper considers testing the unit root hypothesis
against a smooth transition autoregressive model as the alternative. The
model specification makes it possible to discriminate between nonstationary
random walk and stationary nonlinear processes. Some new limit results are
presented, extending earlier work, and two F type tests are proposed. Small
sample simulations show some size distortions, why a bootstrap method for
estimating p-values to the tests are considered. Power simulations show
some gain in power, compared to the common Augmented Dickey-Fuller tests.
Finally, the two proposed F type tests are applied on a number of real
exchange rates. For several of the exchange rates considered the linear
unit root is rejected in favor of the stationary nonlinear model,
supporting the purchasing power parity hypothesis.
Keywords: Smooth transition autoregressive model; nonlinearity; unit root; Brownian motion; bootstrap; critical values; Monte Carlo simulations; real exchange rates; (follow links to similar papers)
JEL-Codes: C22; C52; F31; (follow links to similar papers)
23 pages, November 28, 2003
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