Testing for Unit Roots: What Should Students Be Taught?

Abstract

Unit-root testing strategies are unnecessarily complicated because they do not exploit prior knowledge of the growth status of the time series, they worry about unrealistic outcomes, and they double- or triple-test for unit roots. The authors provide a testing strategy that cuts through these complications and so facilitates teaching this dimension of the unit-root phenomenon. F tests are used as a vehicle for understanding, but t tests are recommended in the end, consistent with common practice.

Key Words:

• teaching econometrics
• unit roots

Additional information

Notes on contributors

John Elder

John Elder (e-mail: [email protected]) is an assistant professor of finance at North Dakota State University. Peter E. Kennedy is a professor of economics at Simon Fraser University. This article is a revised version of a presentation at a conference at Middlebury College in November 1999. The authors thank Dorian Owen and Simon Xu for thoughtful comments.