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Bayesian Unit Root Testing: The Effect of Choice of Prior on Test Outcomes

In: 30th Anniversary Edition

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  • Charley Xia
  • William Griffiths

Abstract

A Monte Carlo experiment is used to examine the size and power properties of alternative Bayesian tests for unit roots. Four different prior distributions for the root that is potentially unity – a uniform prior and priors attributable to Jeffreys, Lubrano, and Berger and Yang – are used in conjunction with two testing procedures: a credible interval test and a Bayes factor test. Two extensions are also considered: a test based on model averaging with different priors and a test with a hierarchical prior for a hyperparameter. The tests are applied to both trending and non-trending series. Our results favor the use of a prior suggested by Lubrano. Outcomes from applying the tests to some Australian macroeconomic time series are presented.

Suggested Citation

  • Charley Xia & William Griffiths, 2012. "Bayesian Unit Root Testing: The Effect of Choice of Prior on Test Outcomes," Advances in Econometrics, in: 30th Anniversary Edition, pages 27-57, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(2012)0000030007
    DOI: 10.1108/S0731-9053(2012)0000030007
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