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Simulating Properties of the Likelihood Ratio Test for a Unit Root in an Explosive Second-Order Autoregression

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Abstract:

This paper provides a means of accurately simulating explosive autoregressive processes and uses this method to analyze the distribution of the likelihood ratio test statistic for an explosive second-order autoregressive process of a unit root. While the standard Dickey-Fuller distribution is known to apply in this case, simulations of statistics in the explosive region are beset by the magnitude of the numbers involved, which cause numerical inaccuracies. This has previously constituted a bar on supporting asymptotic results by means of simulation, and analyzing the finite sample properties of tests in the explosive region.

Keywords: Explosive autoregression; Simulation; Unit root test

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/07474930701512055

Affiliations: 1: Nuffield College, University of Oxford, Oxford, UK 2: St. Cross College, University of Oxford, Oxford, UK

Publication date: September 1, 2007

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