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Nonlinear dynamics in economics and finance and unit root testing

Pavlidis, Efthymios and Paya, Ivan and Peel, David and Siriopoulos, Costas (2013) Nonlinear dynamics in economics and finance and unit root testing. European Journal of Finance, 19 (6). pp. 572-588. ISSN 1351-847X

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    Abstract

    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.

    Item Type: Article
    Journal or Publication Title: European Journal of Finance
    Uncontrolled Keywords: asset prices ; fundamentals ; hyper-inflation ; nonlinear dynamics ; multiple equilibria ; persistence
    Subjects: H Social Sciences > HB Economic Theory
    Departments: Lancaster University Management School > Economics
    ID Code: 39678
    Deposited By: Efthymios Pavlidis
    Deposited On: 03 Feb 2011 09:50
    Refereed?: No
    Published?: Published
    Last Modified: 24 Jan 2014 05:19
    Identification Number:
    URI: http://eprints.lancs.ac.uk/id/eprint/39678

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