A complementary test for ADF test with an application to the exchange rates returns

Liew, Venus Khim-Sen and Lau, Sie-Hoe and Ling, Siew-Eng (2005): A complementary test for ADF test with an application to the exchange rates returns.

Abstract

This study shows that augmented Dickey-Fuller (ADF) test failed to detect covariance nonstationary series. Supportive of Ahamada (2004), this study finds that the cumulative sums of squares procedure in Inclán and Tiao (1994) is useful to complement the ADF test. As illustration, the ADF test indicates that there is no unit root in the returns of Japanese yen/US dollar, British pound/ US dollar and Swiss franc/US. However, the complementary test reveals that each of these returns contains heterogeneous variance. To sum, it can be concluded that these exchange rate returns are covariance nonstationary although there is no unit root.

• Item Type: MPRA Paper
• Language: English
• Keywords: cumulative sums of squares; covariance nonstationary; exchange rate returns
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General

References

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