Lag Order and Critical Values of the Augmented Dickey–Fuller Test

Abstract

Response surface analysis is used to obtain approximate finite-sample critical values for the augmented Dickey–Fuller (ADF) test. Previous studies estimating the critical values for the test have generally ignored their possible dependence on the lag order. This study shows that the lag order, in addition to the sample size, can affect the finite-sample behavior of the test. The result points to the importance of correcting for the effect of lag order in applying the ADF test.

KEY WORDS:

• Finite-sample critical value
• Monte Carlo
• Response surface