Arbeitspapier
Testing for unit roots with cointegrated data
This paper demonstrates that unit root tests can suffer from inflated Type I error rates when data are cointegrated. Results from Monte Carlo simulations show that three commonly used unit root tests - the ADF, Phillips-Perron, and DF-GLS tests - frequently overreject the true null of a unit root for at least one of the cointegrated variables. The reason for this overrejection is that unit root tests, designed for random walk data, are often misspecified when data are cointegrated. While the addition of lagged differenced (LD) terms can eliminate the size distortion, this "success" is spurious, driven by collinearity between the lagged dependent variable and the LD explanatory variables. Accordingly, standard diagnostics such as (i) testing for serial correlation in the residuals and (ii) using information criteria to select among different lag specifications are futile. The implication of these results is that researchers should be conservative in the weight they attach to individual unit root tests when determining whether data are cointegrated.
- Language
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Englisch
- Bibliographic citation
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Series: Economics Discussion Papers ; No. 2015-57
- Classification
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Wirtschaft
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
Methodological Issues: General
- Subject
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unit root testing
cointegration
DF-GLS test
augmented Dickey-Fuller test
Phillips-Perron test
simulation
- Event
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Geistige Schöpfung
- (who)
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Reed, W. Robert
- Event
-
Veröffentlichung
- (who)
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Kiel Institute for the World Economy (IfW)
- (where)
-
Kiel
- (when)
-
2015
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Reed, W. Robert
- Kiel Institute for the World Economy (IfW)
Time of origin
- 2015
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