A Note on Unit Root Tests and GARCH Errors: A Simulation Experiment

Abstract

This article re-examines the Monte Carlo experiments in Seo (1999) for unit root tests with GARCH errors. We report a Monte Carlo study with data generated from various GARCH(1, 1) processes where 0.8 ≤ α + β < 1 and β > α. In this case, the Dickey–Fuller test works better than the Seo test.

Keywords:

• GARCH model
• Unit root test

Mathematics Subject Classification:

• 62F03
• 62M10

Acknowledgment

We would like to thank the anonymous referee and the Associate Editor for very helpful comments and suggestions.

Notes

¹Barassi (2005) studied the behavior of the stationary test developed by Kwiatkowski et al. (1992) in the presence of GARCH errors.

²If ρ = 1, the distribution is the same as Dickey and Fuller (1979).

³The Gauss code used was developed by Seo (1999). The first 100 observations of each series were discarded in order to avoid possible dependence of the results on the initial conditions.