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Unit Root & Augmented Dickey-Fuller (ADF) Test

Unit root tests • Recall the AR(1) process: 1 (0, )2 tt t iid t yy N φε εσ =+ − ∼ • We want to test whether ϕ is equal to 1. Subtracting y t-1 from both sides, we can rewrite the AR(1) model as: Δ(y t)=y t −y t−1 =(φ−1)y t−1 +ε t • And now a test of ϕ =1 is a simple t …

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