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Research output: Contribution to Journal/Magazine › Journal article
Research output: Contribution to Journal/Magazine › Journal article
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TY - JOUR
T1 - Nonlinear dynamics in economics and finance and unit root testing
AU - Pavlidis, Efthymios
AU - Paya, Ivan
AU - Peel, David
AU - Siriopoulos, Costas
PY - 2013
Y1 - 2013
N2 - This paper illustrates the flexibility of the ESTAR model to encompass a number of different characteristics found in economic and financial series, such as multiple equilibria, complex dynamics, chaotic-like behavior, and spurious trends. We then re-assess the power of the Kapetanios et al. (2003), Enders and Granger (1998), and Augmented Dickey Fuller unit root tests in the presence of nuisance parameters for parameter values typically encountered in the empirical literature. Our results show the lack of dominance of any particular test and that the power is not independent to priors about the nuisance parameters. Finally, we examine several asset price deviations from fundamentals and one hyper-inflation series and find contradictory results between the nonlinear fitted models and unit root tests. The findings highlight that new testing procedures with higher power are desirable.
AB - This paper illustrates the flexibility of the ESTAR model to encompass a number of different characteristics found in economic and financial series, such as multiple equilibria, complex dynamics, chaotic-like behavior, and spurious trends. We then re-assess the power of the Kapetanios et al. (2003), Enders and Granger (1998), and Augmented Dickey Fuller unit root tests in the presence of nuisance parameters for parameter values typically encountered in the empirical literature. Our results show the lack of dominance of any particular test and that the power is not independent to priors about the nuisance parameters. Finally, we examine several asset price deviations from fundamentals and one hyper-inflation series and find contradictory results between the nonlinear fitted models and unit root tests. The findings highlight that new testing procedures with higher power are desirable.
KW - asset prices
KW - fundamentals
KW - hyper-inflation
KW - nonlinear dynamics
KW - multiple equilibria
KW - persistence
U2 - 10.1080/1351847X.2011.607006
DO - 10.1080/1351847X.2011.607006
M3 - Journal article
VL - 19
SP - 572
EP - 588
JO - European Journal of Finance
JF - European Journal of Finance
SN - 1351-847X
IS - 6
ER -