Simulating properties of the likelihood ratio test for a unit root in an explosive second order autoregression.

Working paper

This paper provides a means of accurately simulating explosive autoregressive processes, and uses this method to analyse the distribution of the likelihood ratio test statistic for an explosive second order autoregressive process. Nielsen (2001) has shown that for the asymptotic distribution of the likelihood ratio unit root test statistic in a higher order autoregressive model, the assumption that the remaining roots are stationary is unnecessary, and as such the approximating asymptotic distribution for the test in the difference stationary region is valid in the explosive region also. However, simulations of statistics in the explosive region are beset by the magnitude of the numbers involved, which cause numerical inaccuracies, and this has previously constituted a bar on supporting asymptotic results by means of simulation, and analysing the finite sample properties of tests in the explosive region.

Authors: Nielsen, B; Reade, J

• Publisher: Nuffield College (University of Oxford)
• Host title: Economics Group, Nuffield College, University of Oxford, Economics Papers
• Series: Economics Group, Nuffield College, University of Oxford, Economics Papers
• Publication date: 2004-01-01
• Language: English