Gencay, Ramazan and Fan, Yanqin (2007): Unit Root Tests with Wavelets.
This is the latest version of this item.

PDF
MPRA_paper_17013.pdf Download (287kB)  Preview 
Abstract
This paper develops a wavelet (spectral) approach to test the presence of a unit root in a stochastic process. The wavelet approach is appealing, since it is based directly on the different behavior of the spectra of a unit root process and that of a short memory stationary process. By decomposing the variance (energy) of the underlying process into the variance of its low frequency components and that of its high frequency components via the discrete wavelet transformation (DWT), we design unit root tests against near unit root alternatives. Since DWT is an energy preserving transformation and able to disbalance energy across high and low frequency components of a series, it is possible to isolate the most persistent component of a series in a small number of scaling coefficients. We demonstrate the size and power properties of our tests through Monte Carlo simulations.
Item Type:  MPRA Paper 

Original Title:  Unit Root Tests with Wavelets 
Language:  English 
Keywords:  Unit root tests, discrete wavelet transformation, maximum overlap wavelet transformation, energy decomposition. 
Subjects:  C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables C  Mathematical and Quantitative Methods > C5  Econometric Modeling C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General C  Mathematical and Quantitative Methods > C4  Econometric and Statistical Methods: Special Topics 
Item ID:  17013 
Depositing User:  Ramazan Gencay 
Date Deposited:  29. Aug 2009 23:37 
Last Modified:  18. Feb 2013 14:40 
References:  Andrews, D. W. K. (1991). Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica, 59, 817–858. Bhargava, A. (1986). On the theory of testing for unit roots in observed time series. Review of Economic Studies, 53, 369–384. Cai, Y. and Shintani, M. (2006). On the alternative longrun variance ratio test for a unit root. Econometric Theory, 22, 347–372. Chan, N. H. and Wei, C. Z. (1987). Asymptotic inference for nearly nonstationary AR(1) processes. Annals of Statistics, 15, 1050–1063. Coifman, R. R. and Donoho, D. L. (1995). Translation invariant denoising. Wavelets and Statistics, ed. A. Antoniadis and G. Oppenheim, Vol. 103, New York, SpringerVerlag, pages 125–150. Daubechies, I. (1992). Ten Lectures on Wavelets, volume 61 of CBMSNSF Regional Conference Series in Applied Mathematics. SIAM, Philadelphia. Davidson, R., Labys, W. C., and Lesourd, J.B. (1998). Walvelet analysis of commodity price behavior. Computational Economics, 11, 103–128. Dickey, D. A. and Fuller, W. A. (1979). Distributions of the estimators for autoregressive time series with a unit root. Journal of American Statistical Association, 74, 427–431. Duchesne, P. (2006a). On testing for serial correlation with a waveletbased spectral density estimator in multivariate time series. Econometric Theory, 22, 633–676. Duchesne, P. (2006b). Testing for multivariate autoregressive conditional heteroskedasticity using wavelets. Computational Statistics & Data Analysis, 51, 2142–2163. Dufour, J. M. and King, M. (1991). Optimal invariant tests for the autocorrelation coefficient in linear regressions with stationary and nonstationary errors. Journal of Econometrics, 47, 115–143. Elliott, G., Rothenberg, T. J., and Stock, J. H. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64, 813–836. Fan, Y. (2003). On the approximate decorrelation property of the discrete wavelet transform for fractionally differenced processes. IEEE Transactions on Information Theory, 49, 516–521. Fan, Y. and Whitcher, B. (2003). A wavelet solution to the spurious regression of fractionally differenced processes. Applied Stochastic Models in Business and Industry, 19, 171–183. Gen¸cay, R., Sel¸cuk, F., and Whitcher, B. (2001). An Introduction to Wavelets and Other Filtering Methods in Finance and Economics. Academic Press, San Diego. Gen¸cay, R., Sel¸cuk, F., and Whitcher, B. (2003). Systematic risk and time scales. Quantitative Finance, 3, 108–116. Gen¸cay, R., Sel¸cuk, F., and Whitcher, B. (2005). Multiscale systematic risk. Journal of International Money and Finance, 24, 55–70. Granger, C. W. J. (1966). The typical spectral shape of an economic variable. Econometrica, 34, 150–161. Hamilton, J. D. (1994). Time Series Analysis. Princeton University Press, Princeton, New Jersey. Hong, Y. (2000). Waveletbased estimation for heteroskedasticity and autocorrelation consistent variancecovariance matrices. Ph.D. thesis, Working Paper, Department of Economics and Department of Statistical Science, Cornell University. Hong, Y. and Kao, C. (2004). Waveletbased testing for serial correlation of unknown form in panel models. Econometrica, 72, 1519–1563. Hong, Y. and Lee, J. (2001). Onesided testing for ARCH effects using wavelets. Econometric Theory, 17, 1051–1081. Lee, J. and Hong, Y. (2001). Testing for serial correlation of unknown form using wavelet methods. Econometric Theory, 17, 386–423. MacKinnon, J. G. (2000). Computing numerical distribution functions in econometrics. High Performance Computing Systems and Applications, ed. A. Pollard, D. Mewhort, and D. Weaver, Amsterdam, Kluwer, pages 455–470. Mallat, S. (1989). A theory for multiresolution signal decomposition: The wavelet representation. IEEE Transactions on Pattern Analysis and Machine Intelligence, 11, 674–693. Mallat, S. (1998). A Wavelet Tour of Signal Processing. Academic Press, San Diego. Nason, G. P. and Silverman, B. W. (1995). The stationary wavelet transform and some statistical applications. Wavelets and Statistics, Volume 103 of Lecture Notes in Statistics, ed. A. Antoniadis and G. Oppenheim, Springer Verlag, New York, pages 281–300. Nelson, C. R. and Plosser, C. I. (1982). Trends and random walks in macroeconomic time series: Some evidence and implications. Journal of Monetary Economics, 10, 139–162. Newey, W. K. and West, K. D. (1987). A simple positive semidefinite heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica, 55, 703–708. Ng, S. and Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, 1519–1554. Park, H. and Fuller, W. (1995). Alternative estimators and unit root tests for the autoregressive process. Journal of Time Series Analysis, 16, 415–429. Park, J. Y. and Phillips, P. C. B. (1988). Statistical inference in regressions with integrated processes: Part 1. Econometric Theory, 4, 468–497. Park, J. Y. and Phillips, P. C. B. (1989). Statistical inference in regressions with integrated processes: Part 2. Econometric Theory, 5, 95–131. Percival, D. B. (1995). On estimation of the wavelet variance. Biometrica, 82, 619–631. Percival, D. B. and Mofjeld, H. O. (1997). Analysis of subtidal coastal sea level fluctuations using wavelets. Journal of the American Statistical Association, 92, 868–880. Percival, D. B. and Walden, A. T. (2000). Wavelet Methods for Time Series Analysis. Cambridge Press, Cambridge. Phillips, P. C. B. (1986). Understanding spurious regressions in econometrics. Journal of Econometrics, 33, 311–340. Phillips, P. C. B. (1987). Time series regression with a unit root. Econometrica, 55, 277–301. Phillips, P. C. B. and Ouliaris, S. (1990). Asymptotic properties of residual based tests for cointegration. Econometrica, 58, 165–193. Phillips, P. C. B. and Perron, P. (1988). Testing for a unit root in time series regression. Biometrica, 75, 335–346. Phillips, P. C. B. and Solo, V. (1992). Asymptotics for linear processes. Annals of Statistics, 20, 971–1001. Phillips, P. C. B. and Xiao, Z. (1998). A primer on unit root testing. Journal of Economic Surveys, 12, 423–469. Ramsey, J. B. (1999). The contribution of wavelets to the anlaysis of economic and financial data. Philosophical Transactions of the Royal Society of London A, 357, 2593–2606. Sargan, J. D. and Bhargava, A. (1983). Testing residuals from least squares regression for being generated by the Gaussian random walk. Econometrica, 51, 153–174. Schmidt, P. and Phillips, P. C. B. (1992). LM tests for a unit root in the presence of deterministic trends. Oxford Bulletin of Economics and Statistics, 54, 257–288. Sims, C. A., Stock, J. H., and Watson, M. W. (1990). Inference in linear time series models with some unit roots. Econometrica, 58, 113–144. Stock, J. H. (1995). Unit roots, structural breaks and trends. Handbook of Econometrics, ed. R. F. Engle and D. McFadden, Amsterdam, NorthHolland, pages 2739–2841. Stock, J. H. (1999). A class of tests for integration and cointegration. Cointegration, Causality, and Forecasting Festschrift in Honour of Clive W. J. Granger, ed. R. F. Engle and H. White, Oxford, Oxford University Press, Chapter 6. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/17013 
Available Versions of this Item

Unit Root Tests with Wavelets. (deposited 09. Sep 2008 06:25)

Unit Root Tests with Wavelets. (deposited 26. Jun 2009 06:12)
 Unit Root Tests with Wavelets. (deposited 29. Aug 2009 23:37) [Currently Displayed]

Unit Root Tests with Wavelets. (deposited 26. Jun 2009 06:12)