Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 568: Rejection Probabilities for a Battery of Unit-Root Tests

Florin G. Maican () and Richard J. Sweeney
Additional contact information
Florin G. Maican: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden
Richard J. Sweeney: Georgetown University, Washington, D.C.

Abstract: If the researcher tests each model in a battery at the a % significance level, the probability that at least one test rejects is generally larger than a %. For five unit-root models, this paper uses Monte Carlo simulation and the inclusion-exclusion principle to show for a %=5% for each test, the probability that at least one test rejects is 16.2% rather than the upper-bound of 25% from the Bonferroni inequality. It also gives estimated probabilities that any combination two, three, four or five models all reject.

Keywords: Real Exchange Rates; Unit root; Monte Carlo; Break models

JEL-codes: C15; C22; C32; C33; E31; F31

13 pages, June 3, 2013

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