Dickey, Fuller - 1981 - Likelihood Ratio Statistics For Autoregressive Time Series With A Unit Root
Dickey, Fuller - 1981 - Likelihood Ratio Statistics For Autoregressive Time Series With A Unit Root
Dickey, Fuller - 1981 - Likelihood Ratio Statistics For Autoregressive Time Series With A Unit Root
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Econometrica
Let the time series Y, satisfy Y, = a + pY,_ - + e,, where Y1 is fixed and the e, are
normal independent (0, a2) random variables. The likelihood ratio test of the hypothesis
that (a, p) = (0, 1) is investigated and a limit representation for the test statistic is pre-
sented. Percentage points for the limiting distribution and for finite sample distributions
are estimated. The distribution of the least squares estimator of a is also discussed. A
similar investigation is conducted for the model containing a time trend.
1. INTRODUCTION
n -In
% = Y(o) - pj(_ - ) 9
a, a,i /L
where
(1.) t e ot +;(n-- n) + (- t- (t = , ,. , )
An alternative model for Y 2 is
where Y1 is fixed and e, NI(0, 2). Let X denote the (n-1) x 3 matrix whose
ith row is (1,i - In, Y,) and let Y' = (Y2, Y3, . .. , Yn). Then the least squares
1057
Let C, denote the ijth element of (X'X)'. Then the "regression t statistics" a
We construct the likelihood ratio statistics for the null hypothesis that the true
model is a random walk with zero drift. We consider first the test that (a, 3, p)
= (0,0, 1) in model (1.3) against the alternative that the null is not true. The
logarithm of the likelihood function for a sample of n observations from model
(1.3), conditional on Y1, is
Under the null hypothesis, Ho: (a, 3, p) = (0,0, 1), the likelih
with respect to a2 to obtain
n
[1 + 2(n 3)-'(DI 2
where
The likelihood ratio test of the hypothesis HO: (a, /3, p) = (a, 0, 1) in
(1.3) is a monotone function of
The statistics 02 and 0I3 are the common regression "F tests" one would
construct for the hypotheses. The null hypothesis for test D3 iS that the tim
is a random walk with drift a. It is easily demonstrated that the distribution of
the test statistic 03 does not depend upon a.
3. LIMITING DISTRIBUTIONS
Under the null hypotheses, the statistics introduced in Sections 1 and 2 can be
expressed as functions of a few sample statistics. Let
n t-1 2
(3.1) Fn = (n-1)-2 ej
t=2
n-1
n-i
r = yi2Zi2 T= 2
i=l i=l
00 00
W= 22-y
i=l i=l
(2i 2), -
and {Z,}j is a s
Therefore, given that (a, p) = (0, 1),
and
1 0 (n- 1) Wn
(3.4) Dn 'X'XDn' - A,
(3.5) a-Dn1'(X'YX/XO ) f
where
1 0 W
0 1 ! v
A= ? 12 2
w Iv r
2
and f' [T, IT- W, (T2 -1)]. The matrix A is invertible with probability 1
and it is readily verified that
Q + W 2 6VW -w
(3.6) A-'=Q-[ 6VW 12Q + 36V2 -6Vj,
-W -6V I
aDn(A-_ 0) -A f
The third element of A -!f is the limit random variable for n ( - 1)
Dickey and Fuller [7]. Using the fact that S2 converges in probability to a2, we
obtain
A 2
,< Q2- ( Q
P2 9 tAI=-l[2+ 1(2TW)2 + 2
A W2-3V2) 2[(2T-W)(T-6V)-1].
The limiting distributions hold for any fixed Y1 and for e, a sequence of
independent identically distributed random variables.
TABLE I
TABLE II
TABLE III
TABLE IV
TABLE V
TABLE VI
4. SIMULATION
Tables I-VI contain percentiles for the null distributions of the "regression t
A A A
F---- I I _ _
-6 -3 0 3 6
FIGURE 1.-Hist
-6 ~~-3 0 6
FIGURE 2.-Histo
generated with 0' = (0,0, 1). The distributions are symmetric and the histograms
were constructed to be symmetric. The distributions of the T statistics are
distinctive in two respects; the distribution is bimodal and the "spread" of the
distribution is much larger than that of Student's t distribution.
(5.1) Y=0,
Yt =Yt - I + Zt (t = 2, 39 . . . ),
where
E yt2 I1= Op (n 2)
t=2
Therefore
[1 0 -2
HI, 0 l rF-232 V 9
,r-2w W -232 v I
n 2an2 -t ( ( 1)]
discussed in Section 3. Similar results are easily obtained for the regression that
does not contain the time trend.
Tables VII-IX were constructed to give information on the power of the tests.
In Table VII the power was computed for samples of size n = 100 generated for
model (1.1) with p = 0.8, 0.9, 0.95, 1.00, 1.02, and 1.05 and a = 0.0, 0.5, and 1.0.
Fora=0pweiscmutdf3l.
Fora0pweiscmutdf1,l.
TABLEVI
EMPIRCALOWFTwoSDZ0.51(YX)
Ti0.465219 7 Staisc0.51
a p=0.89512
n(T-1)0.57346289 T0.718925634 n(-1)0.8672953 4 1.0 4D30.5721968 420.176593 0.671594.0 1 410.7839265
TABLE VIII
EMPIRICAL POWER OF Two SIDED SIZE 0.05 TESTS AGAINST THE STATIONARY ALTERNATIVE
FOR SAMPLES OF n = 50, 100, AND 250 (20,000 SAMPLES)
Statistic 50 100 250 50 100 250 50 100 250 50 100 250 50 100 250
>1 0.25 0.80 1.0 0.09 0.24 0.94 0.05 0.09 0.37 0.05 0.05 0.05 0.05 0.05 0.05
>2 0.09 0.44 1.0 0.04 0.10 0.64 0.04 0.04 0.15 0.04 0.04 0.04 0.05 0.05 0.05
4>3 0.17 0.59 1.0 0.08 0.16 0.78 0.06 0.07 0.23 0.06 0.05 0.06 0.05 0.05 0.05
n(p - 1) 0.30 0.87 1.0 0.10 0.29 0.97 0.05 0.09 0.43 0.05 0.04 0.05 0.05 0.05 0.05
T9 0.20 0.74 1.0 0.07 0.19 0.91 0.04 0.06 0.31 0.04 0.04 0.04 0.05 0.05 0.05
n(pA- 1) 0.14 0.57 1.0 0.06 0.14 0.78 0.05 0.05 0.21 0.05 0.04 0.04 0.05 0.05 0.05
iT 0.11 0.48 1.0 0.05 0.11 0.69 0.04 0.05 0.16 0.05 0.04 0.04 0.05 0.05 0.05
TABLE IX
EMPIRICAL POWER OF ONE SIDED SIZE 0.05 TESTS FOR SAMPLES OF SIZE 100( YI FIXED
Statistic 0.00 0.50 1.00 0.00 0.50 1.00 0.00 0.50 1.00 0.00 0.50 1.00 0.00 0.50 1.00
d 0.97 0.95 0.89 0.53 0.31 0.03 0.23 0.01 0.00 0.08 0.00 0.00 0.05 0.00 0.00
n(pA- 1) 0.95 0.95 0.96 0.46 0.42 0.29 0.19 0.06 0.00 0.07 0.00 0.00 0.05 0.00 0.00
i 0.86 0.90 0.95 0.30 0.43 0.73 0.12 0.21 0.66 0.06 0.06 0.20 0.05 0.00 0.00
n(pA- 1) 0.73 0.72 0.72 0.24 0.20 0.12 0.10 0.06 0.01 0.05 0.04 0.02 0.05 0.05 0.06
iT 0.64 0.67 0.78 0.18 0.22 0.34 0.08 0.09 0.15 0.05 0.04 0.03 0.05 0.05 0.05
The statistic (DI is the likelihood ratio test of (a, p) = (0, 1) against the alterna-
tive (a, p) 7P (0, 1) for model (1.1). The statistic )2 iS the likelihood ratio test of
(a, 3, p) = (0,0, 1) against the general alternative of model (1.3). Note that in
models (1.1) and (1.3) the initial value Y1 is fixed. Because the alternative is
broader for 02, 02 displays smaller power than J, in Table VII where t
parameter /3 = 0 for all examples of the table. Both 01l and 02 display bias
having power less than the size for p = 0.99. The power of both tests increases as
a increases.
The statistic I3 is the likelihood ratio test of (a, /, p) = (a, 0, 1) against th
general alternative of model (1.3). In Table VII the power of I3 is between tho
of (D, and (2 for p <.99. At p = 1.02 and a = 0, the power of I3 is considerab
less than the powers of (D and (2. No bias is evident in A3.
We have included in Table VII the statistics A, ,, A-n, and T discussed by
Fuller [8, Section 8.5]. The null distributions of the statistics A and T are
computed under model (1.1) with the assumption that (a, p) = (0, 1). The distri-
butions of the statistics for (a, 1), a 7 0 differ from those with a = 0. The null
Y = -p2)-2e (t=1),
where the et are NID(0, 1) random variables. The power was computed for
20,000 samples of each of the three sample sizes. Generally speaking pL is
most powerful of the tests considered. The test I3 is the most powerful of
tests that permit the null model to contain drift.
Table IX contains the power for one sided tests when the true model is (1.1)
with p < 1. Included in this table is the von Neumann ratio
n -1n
d = n[E Y-n] ( Yt-t l)29
t=l ~~t=2
where
n
Yn=n-l .
t= 1
Sargan [15] gives percentiles for d when Yt is generated by model (1.1) with
(a, p) = (0, 1). For sample sizes 50 and 100 and significance level 0.05 we use the
percentiles from Sargan's paper. The jth percentile of the limit distribution for d
is the reciprocal of the (100-j)th percentile in the table of Anderson and
Darling [2, p. 203]. For finite sample sizes not considered by Sargan, we use the
asymptotic percentiles as critical values for the power calculations of Table IX.
Fuller [9] has constructed modifications of the statistic d that are applicable to
higher order autoregressive processes and to model (1.3). The methods used to
generate the samples of Table IX are those used to generate the samples of Table
VII with p < 1. The statistic d is an appropriate test when the alternative is that
Y, is a stationary first order autoregressive time series. It displays good power for
this alternative (that is, when a = 0 and p < 1). The statistic n(p - 1) is only
slightly less powerful than d for a = 0 and maintains somewhat better power for
a & 0. For p < 1 and a # 0 the estimator P is closer to one on the average than
the corresponding estimator associated with a = 0. Therefore, the tests A andT,
display poor power for values of p close to one and a #0 O. Because the estimator
p, converges to p for p < 1, there is some sample size for any p < 1 for which the
TABLE X
MODELS AND TEST STATISTICS
Test
Null Model Alternative Model Statistic
Yt = a +,_t + pY,I+e, A A
Yt = c + Yt- I t Y + e, PY 1 t " PTas
Yt = Yt - I + et Yt = a + pYt- I + et d
P < I
aPoor power for Y, not stationary, a =, 0, small n, and p less than, but close to one.
statistics will have power greater than the size. Because the null distributions are
derived under the assumption that (a, p) = (0, 1), there is no sample size for
which the tests d, p, and are appropriate if the alternative includes a :# 0 and
p= 1.
The test statistics discussed in this section and the hypotheses for which they
are appropriate are summarized in Table X.
7. EXAMPLE
To illustrate the use of the tables we study the logarithm of the quarterly
Federal Reserve Board Production Index 1950-1 through 1977-4. We assume
that the time series is adequately represented by the model
where 0.000533 = 0.056448/106 is the residual mean square for the full model
regression. As there are 110 observations in the regression the 97.5 per cent point
of the distribution of (12, as given in Table V, is 5.59. Therefore the hypothesis
Po= ,B = 0 and a1 = 1 is rejected at the 2.5 per cent level.
To test the hypothesis that f,3 = 0 and a1 = 1 against the general alternative
(7.1) we compute
The 95 per cent point of the distribution is given in Table VI as 6.49 and the
90 per cent point as 5.47. Therefore at the 5 per cent level one could accept the
hypothesis that the second order autoregressive process has a unit root with
possible drift under the maintained hypothesis that the process is second order.
The null hypothesis would be rejected at the 10 per cent level. We note that on
the basis of Table 8.5.2 of Fuller [8] the statistic
;.-0.119. 6
TT= 0.033
0? 9- 3.61
would lead to rejection of the hypothesis of a unit root at the 10 per cent level if
a two sided test is performed. If the alternative is that both roots are less than
one in absolute value the hypothesis of a unit root is rejected at the 5 per cent
level.
REFERENCES
[7] DICKEY, D. A., AND W. A. FULLER: "Distribution of the Estimators for Autoregressive Time
Series with a Unit Root," Journal of the American Statistical Association, 74(1979), 427-431.
[8] FULLER, W. A.: Introduction to Statistical Time Series. New York: John Wiley and Sons, 1976.
[9] : "Testing the Autoregressive Process for a Unit Root," Report to the U.S. Census
Bureau, 1979.
[10] HASZA, D.: "Estimation in Nonstationary Time Series," Iowa State University Ph.D. thesis,
1977.
[11] MANN, H. B., AND A. WALD: "On Stochastic Limit and Order Relationships," Annals of
Mathematical Statistics, 14(1943), 217-226.
[12] RAo, M. M.: "Consistency and Limit Distributions of Estimators of Parameters in Explosive
Stochastic Difference Equations," Annals of Mathematical Statistics, 32(1961), 195-218.
[13] : "Asymptotic Distribution of An Estimator of the Boundary Parameter of an Unstable
Process," Annals of Statistics, 6(1978), 185-190.
[14] RUBIN, H.: "Consistency of Maximum-Likelihood Estimates in the Explosive Case," in Statisti-
cal Inference in Dynamic Economic Models, ed. by T. C. Koopmans, 1950.
[15] SARGAN, J. D.: "The Durbin-Watson Ratio of the Gaussian Random Walk," London School of
Economics manuscript, 1973.