A Decision-Theoretic Analysis of the Unit-Root Hypothesis Using Mixtures of Elliptical Models

Gary Koop, Mark F. J. Steel
1994 Journal of business & economic statistics  
This paper develops a formal decision theoretic approach to testing for a unit root in economic time series. The approach is empirically implemented by specifying a loss function based on predictive variances; models are chosen so as to minimize expected loss. In addition, the paper broadens the class of likelihood functions traditionally considered in the Bayesian unit root literature by: i) Allowing for departures from normality via the specification of a likelihood based on general
more » ... densities; ii) allowing for structural breaks to occur; Hi) allowing for moving average errors; and iv) using mixtures of various submodels to create a very flexible overall likelihood. Empirical results indicate that, while the posterior probability of trend-stationarity is quite high for most of the series considered, the unit root model is often selected in the decision theoretic analysis.
doi:10.1080/07350015.1994.10509993 fatcat:lkuwxsjfafhgzgf22awct4elay