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HEGY (2)

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10/23/2012

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# Hylleberg, Engle, Granger and Yoo, 1992

Quarterly data
We often use seasonal differencing to remove nonstationarity in seasonal data. That is, we use ∆4 yt = yt − yt −4 in quarterly data. Assume that we have shown that ∆4 yt is stationary (with the aid of the usual ADF test). An important question concerns whether we are using more differencing than necessary? This overdifferencing can be a problem, since it introduces spurious MA terms into the series. The quarterly differencing operator can be decomposed as ∆4 = ( I − L)( I + L)( I + L2 ) . The fact that ∆4 yt is stationary implies that at least one of the following must hold A] ( I − L) = 0 ⇒ yt − yt -1 is stationary ⇒ yt ≈ yt −1 B] ( I + L) = 0 ⇒ yt + yt -1 is stationary ⇒ yt ≈ − yt −1 ⇒ yt ≈ yt −2 C] ( I + L2 ) = 0 ⇒ yt + yt -2 is stationary ⇒ yt ≈ − yt −2 ⇒ yt ≈ yt −4 nonseasonal unit root biannual unit root. annual unit root

Note that it is not necessary that all these conditions should hold at the same time. Any one of them will ensure the stationarity of ∆ yt . Assume that [A] does not hold. In this case the regression of yt on yt −1 will not yield a unit root, i.e. the regression of ( I − L) yt on yt −1 will not give a zero parameter. To ensure stationarity of the LHS of this regression we multiply by ( I + L)( I + L2 ) on both sides, that is we

perform a regression of ∆4 yt on ( I + L)( I + L2 ) yt −1 . In a similar manner we can test if [B] holds by regressing ∆4 yt on ( I − L)( I + L2 ) yt −1 . To test if [C] hold we can regress ∆4 yt on ( I − L)( I + L) yt −1 , but this will only test for a cycle which peaks at quarters one and three. To test if the cycle peaks at quarters two and four we must regress ∆4 yt on ( I − L)( I + L) yt −2 . In practice we perform all these tests at the same time. We will also take into account the possible presence of deterministic trend and seasonality, and the fact that ∆4 yt need not be white noise. The HEGY procedure is as follows. Define the following variables: y1t ≡ ( I + L)( I + L2 ) yt = yt + yt −1 + y y −2 + yt −3 y2t ≡ −( I − L)( I + L2 ) yt = −( yt − yt −1 + y y − 2 − yt −3 ) y3t ≡ ( I − L)( I + L) yt = ( I − L2 ) yt = yt − y y −2 , and y4t ≡ ∆4 yt = yt − y y −4 The reason for the minus sign in the definition of y2t is to ensure the usual direction of the one-sided test of the hypothesis H B . Franses also has a minus sign in the definition y3t , but this doesn't affect the two-sided alternative to H C .

HC HB . How should we interpret the results? One use is to determine how much differencing of yt is necessary if we want to use SARIMA. for various µ t . ∆12 = ( I − L)( I + L)( I + L2 )( I + L 3 + L2 )( I − L 3 + L2 )( I + L + L2 )( I − L + L2 ) . Critical values of these tests. The following table can be useful These hypotheses aren't rejected HA .t and (lags of y4t ) are included to ensure that the residuals are white noise. two-monthly. HB HA . HC HA . HB HA .t −1 + π2 y2. H B : π2 = 0 ⇒ biannual unit root. and yearly unit roots (plus one at the non-integer interval 12/5). HC HA HB HC − These hypotheses are rejected − HC HB HA HB . H B .t −2 + π4 y3. An appropriate regression uses the following decomposition – see Franses p 111. HC HA . H B . six-monthly. three-monthly. We can now test the following hypotheses H A : π1 = 0 ⇒ nonseasonal unit root. four-monthly. HC HA . . The hypothesis H C is tested using a F-test. H A and H B are tested using one-sided t-tests (we test against the hypothesis that πi < 0 ). are given on page 3.t −1 + π3 y3. H C : π3 = π4 = 0 ⇒ annual unit root.t −1 + (lags of y4t ) + εt where µ t = DT + DS = δ + βt + ∑ αs Ds .2 The HEGY regression is y4t = µ t + π1 y1. HC Stationary variable ∆4 yt ( = y4t ) ∆2 yt ( = y3t ) ( I − L)( I + L2 ) yt ( = y2t ) ( I + L)( I + L2 ) yt ( = y1t ) ∆1 yt ( I + L) yt ( I + L2 ) yt yt Other uses are for forecasting and seasonal cointegration Monthly data Monthly data can have monthly.

63 −2.64 4.56 Intercept and Trend HA: t-test π 1 = 0 n 48 100 136 200 1% −4.09 −4.08 −2.59 HC: F-test π 3 = π 4 = 0 1% 4.95 −1.92 10% −1.87 10% −2.96 −1.71 −3.56 5.73 4.59 −2.70 4.96 5% 6.35 2.52 5.16 −3.62 6.55 5.91 −1.32 2.78 4.53 −3.50 5% −3.15 HB: t-test π 2 = 0 1% −2.49 10% −3.44 10% −3.59 −2.60 −2.56 −3.66 5% 2.60 HC: F-test π 3 = π 4 = 0 1% 9.60 6.89 10% −2.04 3.73 −2.36 2.08 −2.68 −2.59 5% −1.57 −3.47 −3.57 HB: t-test π 2 = 0 1% −2.52 −3.58 −2.60 −1.80 −3.60 −3.92 8.94 −2.95 2.75 −3.63 −2.35 2.77 8.95 −2.72 −2.60 HC: F-test π 3 = π 4 = 0 1% 9.51 5% −3.63 6.51 −3.62 −2.74 8.66 −3.48 5% −2.94 −1.58 −2.3 HEGY's Seasonal unit-root critical values for quarterly data Only Intercept HA: t-test π 1 = 0 n 48 100 136 200 1% −3.07 −4.21 −3.93 5% 6.95 10% −1.15 −4.52 5% −3.08 3.63 −2.22 8.21 −3.59 HB: t-test π 2 = 0 1% −3.32 2.60 −1.55 6.98 3.04 −2.04 3.61 −2.57 4.79 8.27 8.23 −4.07 10% 2.94 −2.62 HC: F-test π 3 = π 4 = 0 1% 4.09 −4.16 −3.50 5.37 Intercept and Seasonal Dummies HA: t-test π 1 = 0 n 48 100 136 200 1% −3.94 −2.57 10% 5.56 .96 −2.58 5% −1.91 10% −2.58 −1.56 5.57 6.47 −3.89 −2.61 10% 5.49 −3. Seasonal Dummies and Trend HA: t-test π 1 = 0 n 48 100 136 200 1% −4.37 −3.62 −2.90 −2.91 10% −2.95 −1.05 5% −3.60 −3.05 5% −3.00 3.61 −2.63 −1.91 −1.58 −2.36 2.46 −3.46 −4.57 −1.37 5.69 −2.60 −1.77 −3.77 4.65 −2.18 HB: t-test π 2 = 0 1% −3.22 −3.37 Intercept.55 −3.60 6.93 −2.56 −3.76 5% 3.88 −2.12 10% 2.

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