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: Journal Article
Journal or Publication Title: European Journal of Finance
Uncontrolled Keywords: /dk/atira/pure/researchoutput/libraryofcongress/hb
Subjects:
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: 21 Sep 2019 23:33
URI: https://eprints.lancs.ac.uk/id/eprint/39678

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