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Unit Root Testing in ARMA Models: A Likelihood Ratio Approach

Author

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  • Hernández, Juan R.
Abstract
In this paper I propose a Likelihood Ratio test for a unit root (LR) with a local-to-unity Autoregressive parameter embedded in ARMA(1,1) models. By dealing explicitly with dependence in a time series through the Moving Average, as opposed to the long Autorregresive lag approximation, the test shows gains in power and has good small-sample properties. The asymptotic distribution of the test is shown to be independent of the short-run parameters. The Monte Carlo experiments show that the LR test has higher power than the Augmented Dickey Fuller test for several sample sizes and true values of the Moving Average parameter. The exception is the case when this parameter is very close to -1 with a considerably small sample size.

Suggested Citation

  • Hernández, Juan R., 2016. "Unit Root Testing in ARMA Models: A Likelihood Ratio Approach," MPRA Paper 100857, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:100857
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    File URL: https://mpra.ub.uni-muenchen.de/100857/1/MPRA_paper_100857.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Likelihood ratio test; ARMA model; Unit root test.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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