Unit Roots, Change, and Decision Bounds

Kunst, Robert M.ORCID: https://orcid.org/0000-0001-6831-2471 (September 1998) Unit Roots, Change, and Decision Bounds. Former Series > Working Paper Series > IHS Economics Series 58


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Abstract: The problem of optimal decision among unit roots, trend stationarity, and trend stationarity with structural breaks is considered. Each class is represented by a hierarchically random process whose parameters are distributed in a non-informative way. The prior frequency for all three processes is the same. Observed trajectories are classified by two information condenser statistics zeta1 and zeta2. zeta1 is the traditional Dickey-Fuller t-test statistic that allows for a linear trend.zeta2 is a heuristic statistic that condenses information on structural breaks. Two loss functions are considered for determining decision contours within the (zeta1, zeta2) space. Whereas quadratic discrete loss expresses the interest of a researcher attempting to find out the true model, prediction error loss expresses the interest of a forecaster who sees models as intermediate aims. For both loss functions and the empirically relevant sample sizes of T=50, 100, 150, 200, optimal decision contours are established by means of Monte Carlo simulation.;

Item Type: IHS Series
Keywords: 'Time series' 'Integrated processes' 'Structural breaks' 'Loss function'
Classification Codes (e.g. JEL): C22, C44
Date Deposited: 26 Sep 2014 10:36
Last Modified: 08 Apr 2024 13:45
URI: https://irihs.ihs.ac.at/id/eprint/1096

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