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‘Objective’ bayesian unit root tests
Author(s) -
Koop G.
Publication year - 1992
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/jae.3950070107
Subject(s) - unit root , prior probability , bayesian probability , econometrics , root (linguistics) , odds , bayesian average , unit (ring theory) , mathematics , statistics , posterior probability , bayesian statistics , computer science , bayesian inference , logistic regression , linguistics , philosophy , mathematics education
Due to weaknesses in traditional tests, a Bayesian approach is developed to investigate whether unit roots exist in macroeconomic time‐series. Bayesian posterior odds comparing unit root models to stationary and trend‐stationary alternatives are calculated using informative priors. Two classes of reference priors which are informative but require minimal subjective prior input are used. In this sense the Bayesian unit root tests developed here are objective. Bayesian procedures are carried out on the Nelson–Plosser and Shiller data sets as well as on generated data. The conclusion is that the failure of classical procedures to reject the unit root hypothesis is not necessarily proof that a unit root is present with high probability.