Testing for Unit Root Processes for South American Countries
Testing for Unit Root Processes for South American Countries
Abstract
In this thesis, we aim to test the Purchasing Power Parity (PPP) hypothesis
on data from ten di erent South American countries, using di erent statistical
methods. We begin by testing the hypothesis using the standard linear tests
augmented Dickey-Fuller and Phillips-Perron. We then continue to test in case
of nonlinear processes with methods developed to increase the power of the
tests; exponential smooth transition autoregressive (ESTAR) and assymetric
ESTAR (AESTAR). Finally, the panel unit root Choi test is applied. We use
monthly real e ective exchange rate data from 10 di erent South American
countries, provided by Bruegel. Our results show that the p-values generally
increase when comparing the linear Dickey-Fuller and Phillips-Perron test to
the ESTAR and AESTAR tests. We reject the null hypothesis of a unit root for
one country using the ESTAR test and for three countries using the AESTAR.
We have ambiguous changes in the p-values when comparing the AESTAR to
the ESTAR. For the Choi test, we reject the null hypothesis of a unit root
for all tests but the ESTAR test. Rejecting the null hypothesis of a unit root
indicates that the PPP hypothesis holds. Hence, new tests, e.g. nonlinear and
panel data tests that have a higher power compared to the standard linear
tests, may lead to the vindication of the PPP hypothesis.
Degree
Student essay
Collections
View/ Open
Date
2016-02-18Author
Emmoth, Stefan
Nordfors, Nicklas
Series/Report no.
201602:181
Uppsats
Language
eng