Mean reversion unit root test pdf

Subtracting y t1 from both sides, we can rewrite the ar1 model as. T his paper is to examine the mean reverting properties of inflation rates for irans 25 provinces over the period from 1990. In statistics and econometrics, an augmented dickeyfuller test adf tests the null hypothesis. The meanreverting property of a time series can be exploited in order to produce profitable trading strategies. The results of lm fourier unit root test show that stock prices in all these seven stock markets demonstrate significant mean reversion. Mean reversion of inflation rates in 19 oecd countries. In probability theory and statistics, a unit root is a feature of some stochastic processes such as. For instance, z hu 1998 applied the levin an d lin 1992 panel unit root. This paper extends the unit root test of christopoulos and leonledesma 2010 to accommodate not only structural breaks and nonlinear mean reversion, but also the contemporaneous cross. The presence of a unit root can be tested using a unit root test. To illustrate the adf test procedure, consider testing for a unit root.

The basic objective of the test is to test the null hypypothesis that. A the expected value of something is the long run population average. In this article we are going to outline the statistical tests necessary to identify mean reversion. Lee, chienchiang and chunping chang, 2007 mean reversion of inflation rates in 19 oecd countries. Results of conventional unit root tests indicate that the null hypothesis of the unit root test is. The purpose of this paper is to examine the relevance of applying nonlinear panel unit root test to examine the nonlinear mean reversion behaviors of real exchange rates. In contrast, when the process has no unit root, it is stationary and hence exhibits reversion to the mean so the.

The results of the stationary test can be divided into two parts. To the end, we use various conventional univariate linear and nonlinear unit root tests, as well as quantile unit root test by koenker and xiao 2004. Mean reversion in stock prices of seven asian stock. An introduction to testing for unit roots using sas. In both unit root and trendstationary processes, the mean can be growing or. Dickeyfuller unit root test applied to discrete samples from a diffusion model becomes a test of no mean reversion rather than a unit. Overall, some policy implications are obtained in this paper. In particular, we will study the concept of stationarity and how to test for it. Basics of statistical mean reversion testing quantstart. To test for a unit root using the adf test, one estimates the following model. The testing procedure for the adf test is the same as for the dickeyfuller test but it is applied to the model. In fact, the unit root test has commonly been used to test for the nonstationarity or the absence of mean reversion in a much broader class of time series models than autoregressive models.

Since traditional unit root tests are unable to incorporate structural breaks which contributes to the lack of power in detecting mean reversion for stock prices, we tend to the fourier unit root test developed by enders and lee 2012. Our main contribution is to propose an alternative testing procedure in order to. Investigating mean reversion across national stock markets. When a level term is included in the model, the stock price of thailand is meanreverting while stock prices of other regions mainland china, hk, china, japan, south korea, malaysia and singapore are nonstationary. The dickeyfuller test the earlyyp g g and pioneering work on testing for a unit root in time series was done by dickey and fuller dickey and fuller 1979, fuller 1976.