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Table 1. Critical Values for the Dickey-Fuller Test Sample Size F ratio (5%) AR model with constant 2% -3.75 5% -3.33 10% -2.63 AR model with constant and time trend 2% -4.38 5% -3.95 10% -3.24 25 7.24 50 6.73 -3.58 -3.22 -2.60 -4.15 -3.80 -3.18 100 6.49 -3.51 -3.17 -2.58 -4.04 -3.69 -3.15 ¥ 6.25 -3.43 -3.12 -2.57 -3.96 -3.66 -3.13

We have a series, y t , t = 1,…,T. This could be, for instance, monthly values for the level of the TSE 300 index from January 1997 to December 1998 from the file Indxdata.xls on the Comm472 web site (which is the series I will use in the following example). This series is shown in the following table:

Date 1/31/97 2/28/97 3/31/97 4/30/97 5/30/97 6/30/97 7/31/97 8/29/97 9/30/97 10/31/97 11/28/97 12/31/97 1/30/98 2/27/98 3/31/98 4/30/98 5/29/98 6/30/98 7/31/98 8/31/98 9/30/98 10/30/98 11/30/98 12/31/98 t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

yt

6109.58 6157.84 5850.22 5976.63 6382.12 6437.74 6877.68 6611.79 7040.23 6842.36 6512.78 6699.44 6700.2 7092.49 7558.5 7664.99 7589.78 7366.89 6931.43 5530.71 5611.9 6208.28 6343.87 6485.94

To do the regular Dickey-Fuller test on y t , we run the following regression: y t - y t -1 = Dy t = a 0 + a 1 y t -1 + e t , and test the hypothesis that a 1 = 0 . If we can’t reject the null hypothesis, we say that the process has a unit root. In order to do this test in Excel, we first have to compute Dy t . Assume that the values of y t are in cells A1 to A24 on the Excel spreadsheet. To compute Dy t in column B, click on cell B2 and enter “=A2 – A1”, then click on B2 again and drag down to cell B24 (the end of the series, in this case). The first four rows of the spreadsheet should then look like: A

1 2 3 4 6109.58 6157.84 5850.22 5976.63

B

48.26 -307.62 126.41

Now, select cells B2 – B24, click ‘Edit’Þ’Copy’ then ‘Edit’Þ’Paste Special’, select ‘values’ then ‘OK’. This replaces the formulas ‘=A2 – A1’, etc, in the cells with their values. Now, select ‘Regression’ from either the ‘Tools’Þ’Data Analysis’ menu in Excel, or the ‘Time Series’ menu. For the “Y range” select cells B2 – B24. This is the series Dy t , for t = 2,…24. For the “X range” select cells A1 – A23. Note that our X variable is now ‘ y t -1 ’, for t –1 = 1,…,23 (or t = 2,…,24). In other words, we are regressing Dy t on lagged values of y t .

ˆ The estimated slope coefficient ( a1 ) from this regression is –0.25464 and the t statistic is –1.8125. (try it). From Table 1, the 2% critical value for the ‘AR model with constant’ with 25 observatons (we have 23, so this is close enough) is –3.75, the 5% critical value is –3.33, and the 10% critical value is –2.63. [Note: the ‘Time Series’ unit root test only reports the 10% critical value]. Since –1.8125 > -2.63, we can NOT reject the hypothesis that there is a unit root.

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