Distribution of the Estimators for Autoregressive Time Series With a Unit Root David A. Dickey, Wayne A. Fuller Journal of the American Statistical Association, Volume 74, Issue 366 (Jun., 1979), 427-431, Stable URL: hhup//links jstor-org/sici?sici=0162-1459%28197906% 297493 366%3C427%3ADOTEFA%3E2.0,CO%3B2-3 ‘Your use of the ISTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at hhup:/www.jstororg/about/terms.html. JSTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission, Journal of the American Statistical Association is published by American Statistical Association. Please contact the publisher for further permissions regarding the use of this work. Publisher contact information may be ob\ained at hutp:/ivww stor.org/joumalsfastata html Jounal of the American Statistical Association (©1979 American Statistical Association ISTOR and the ISTOR logo are trademarks of ISTOR, and are Registered in the U.S. Patent and Trademark Office. For more information on JSTOR contact jstor-info@umich.edu, ©2002 JSTOR hupulwww jstor.org/ Wed Oct 9 02:54:21 2002Distribution of the Estimators for DAVID A. DICKEY and WAYNE A. FULLER* Autoregressive Time Series With a Unit Root It n observations Ys, Yo, c+. Yq be generated by the model Y.= p¥n1 eg whore Yo is fixed constant and [ey]. i a se- ‘quence of independent normal random variables with mean 0 and ‘Variance ot. Propertios of the regression estimator of pare obtained under the assumption that p= -e1. Representations for the limit, distributions of the estimator of p and of the regression {test are ‘erived. The estimator of p and the regression {test furnish methods of testing the hypothesis that » = 1 KEY WORDS: Time series; Autoregressive; Random walk; Difereneing. Nonstationary; 1, INTRODUCTION Consider the autoregressive model t= 1,2, Yee pYiate, » Ga) where Yo = 0, p isa real number, and {¢,} is a sequence of independent normal random variables with mean zero and variance o* [i.e., e NID(O, 2*)] ‘The time series ¥, converges (as (-» @) toa stationary time series if |p| <1. If |p| = 1, the time series is not stationary and the variance of Y; is (e*, The time series with p = Lis sometimes called a random walk. If |p| > 1, the time series is not stationary and the variance of the time series grows exponentially as ¢ increases. Given n observations Ys, Ys, ..., Yo, the maximum, likelihood estimator of p is the least squares estimator b= (Yay Eve a2) Rubin (1950) showed that @ is a consistent estimator for all values of p. White (1958) obtained the limiting joint-moment generating funetion for the properly nor- matized numerator and denominator of @—p. For lol x 1 he was able to invert the joint-moment get erating funetion to obtain the limiting distribution of 4 — p. For |p| <1 the limiting distribution of n!(a ~ ») is normal. For |p| > 1 the limiting distribution of loin(o — 1)-@ — ») is Cauchy. For p = 1, White was able to represent the limiting distribution of n(p ~ 1) as that of the ratio of two integrals defined on the Wiener process * Wayne A. Fuller is Profestor of Statistics at Towa State Uni- versity, Ames, LA 50011, David A. Dickey is Assistant Professor of Statisties at North Carolina State University, Raleigh, NC 27650. ‘This researeh was partially supported by Joint Statistical Agreement [No 76-08 with the Bureat of the Census. Rao (1961) extended White's results to higher-order autoregressive time series whose characteristic equations have a single root exceeding one and remaining roots less than one in absolute value. Anderson (1959) obtained the limiting distributions of estimators for higher-order processes with more than one root exceeding one in absolute value. ‘The hypothesis that p = 1 is of some interest in ap- plications because it corresponds to the hypothesis that is appropriate to transform the time series by di encing. Currently, practitioners may decide to difference «8 time series on the basis of visual inspection of the auto- correlation function. For example, see Box and Jenkins (1970, p. 174). The autocorrelation function of the devia- tions from the fitted model is then investigated as a test of the appropriateness of the model, Box and Jenkins (1970, p. 201) suggested the Box and Pierce (1970) test statistic andr, (1.3) where 2 na (Det YE bln and the é’sare the residuals from the fitted model. Under the null hypothesis, the statistic Qx is approximately dis- tributed as a chi-squared random variable with K — p degrees of freedom, where p is the number of parameters estimated. If |¥.} satisfies (1.1) then p = 0 under the null hypothesis and @ = ¥y— Yin ‘The likelihood ratio test of the hypothesis Ho: p = 1 isa function of G- NSE Ye, where SP=@-w DK Yow In this article we derive representations for the limiting distributions of 6 and of #, given that [p| = 1. The representations permit construction of tables of the percentage points for the statisties. The statistes @ and # (© Journal of the American Statistical Assoclation ‘June 173, Volume 74, Number 366 ‘Theory and Methods Section aa8 are also generalized to models containing intercept and time terms, In Section 4 the Monte Carlo method is used to com- pare the power of the statisties # and f with that of Qx. Examples are given in Section 5: 2. MODELS AND ESTIMATORS ‘The class of models we investigate consists of (a) the ‘model (1.1), (b) the model Yizat Yerba, (= 1,2, (ay Yo=0 and (c) the model Via nt ot Yate, 22) Ye=0 Assume m observations Yi, Ys, ...) Yx are available for analysis and define the (n — 1) dimensional vectors, VeQLy.ud, t= (1 = (n/2),2 - (n/2), =), Y= (Va Va Pacey Va) Yea = (Yn Va Yan eeey Vou) « Let Us = Yeu, Us = (1, Yes), and Uy = (1, t, Yea). We define A, as the last entry in the vector (WU,)"Y, , 23) and define 6, as the last entry in the vector (ByU,)"WY, 24) ‘The statistics analogous to the regression {statistics for the test of the hypothesis that p = 1 are # =~ D(Sate, 2) fa (Be — W(Sites)>, 2.6) f= (r= 1)(Sives)", en where Sif is the appropriate regression residual mean square Sa = (n= k= ICY — UT) “"WY, (2.8) and cy is the lower-right element of (Uy’Us)~ 3. LIMIT DISTRIBUTIONS AAs the first step in obtaining the limit distributions we investigate the quadratic forms appearing in the sta- tisties. Because the estimators are ratios of quadratic forms we lose no generality by assuming o* = 1 in the sequel. 3.1 Canonical Representation of the Statistics Given that p = 1, the quadratic form Sfaz Yi? can bbe expressed as @,/Ases, where @y! = (es, €3) «+1 Oxy the elements ai; of Ay satisfy ay = 1, ay = 2 for ion, June 1979 J > Ay a4 = ayy = —1 for alll j, and ay = 0 other wise. By a result of Rutherford (1946), the roots of Ay are Ree = (4) seet((n = )r/(Qn = 1) , POL %eyn-d Let M be then — 1 by n ~ 1 orthonormal matrix whose ‘th row is the eigenvector of A, corresponding to diy. The ith element of M is, mi = 220 = 1) cos [(4n — 2102 — QF Ye], 1) and we can express the normalized denominator sum of EF valt, — 2) where Z = (Zin Zany )' = Me,. Let Hy= nt mt fa nt fa s[n(n = 1) n(n = 2) nfm—3) 2. on 0 n=2 %n-3) and (Pu, We, Vo)! = Yn! E Vea E (n= DG Dey” = Hue, = HM-z @3 Then nlp = 1) = APY = 1) + Og , (a) nj ~ 1) = QP, = BWP — 1 — 27.) O(n), (3.5) n= 1) = Ws — Wat = BV} C(Ps = 2W.)(Ps = OV) = 1] + Opn). (B.6) 3.2 Representations for the Limit Distributions Having expressed n( — 1), (A, ~ 1), and n(@, = 1) in terms of (Ps, Ts, Wa, V) we obtain the limiting di tribution of the vector random variable. The following Iemma will be used in our derivation of the limit distribution Lemma 1: Let (Zi) be a sequence of independent, random variables with zero means and common variance of. Let {wi;i = 1,2, ..-] bea sequence of real numbers and let (wn; = 1,2, --.,2—1jn= 1,2...) bea triangular array of real numbers. If Luce, Tim E wat = Ewe,Dickey and Fuller: Time Series With Unit Root and Jim wey = a4 then DfL1 w%, is well defined as a limit in mean square and plim {E wiZi] = Ewe « Proof: Let «> 0 be given. Then we ean choose an M such that eb weds and “™ aE we Ewe <9, for all n > M. Furthermore, given M, we ean choose Nq> A such that n > Me implies PE (wa wi? < 0/9 and “ o E me < 8/9 Hence, for all n > No, vast was = Ewa 1 the ranking was reversed and the #, statistic was more powerful. For sample sizes of 50 and 100, and p < 1, Qs was the most powerful of the Q statistics studied. For sample size 250, Qs was the most powerful @ statistic. ‘The size of the @ tests for K > 5 was considerably less than .05 for n= 50, There is evidence that # and %, are biased tests, ac- cepting the null hypothesis more than 95 percent of the time for p close to, but less than, one. Because the tests are consistent, the minimum point of the power function is moving toward one as the sample size increases. 5. EXAMPLES Gould and Nelson (1974) investigated the stochastie structure of the velocity of money using the yearly ob- servations irom 1869 through 1960 given in Friedman and Schwartz (1963). Gould and Nelson concluded that the logarithm of velocity is consistent with the model X= Xerten where ~N(, 0) and X; is the velocity of money Two models, X= Xi = eX - X) te 6.) and XisuteXeate, (6.2)Dickey ond Fuller: Time Series With Unit Root were fit to the data. For (5.1) the estimates were RX = L008 (Xa = 4) 0052 (0094) and for (6.2), R, = 0141 + .9702X,4 (.0176) (0199) Model (5.1) assumes that it is known that no intercept centers the model if X1 is subtracted from all observations. Model (5.2) permits an intercept in the model. The ‘numbers in parentheses are the “standard errors” output by the regression program. For (5.1) we compute n(p — 1) = 91(.0044) = 4004 @ = .0050 and # = (.0004)-"(.0044) = 4681. Using cither Table 8.5.1 or 8.5.2 of Fuller (1976), the hypothesis that » = 1 is accepted at the .10 level For (6.2) we obtain the statistics n(p, — 1) = 92(,9702 — 1) = 2.742 and 4, = (.0199)-*(,9702 = 1.0) = = 1.60 Again the hypothesis is accepted at the .10 level. ‘As a second example we study the logarithm of the ‘quarterly Federal Reserve Board Production Index for the period 1950-1 through 1977-4. We assume that the time series is adequately represented by the model Yo= Bot Bil + ai¥er + aaYir ter, where ¢, are NID(O, o#) random variables. On the basis of the results of Fuller (1976, p. coefficient of ¥,.1 in the regression equation Yim Ver Bot bl + (a tar ~ Yea sa(¥ia— Ya) be 9) the ‘can be used to test the hypothesis that p = a: ++ az = 1 ‘This hypothesis is equivalent to the hypothesis that one of the roots of the characteristic equation of the process is one. The least squares estimate of the equation is Pom Vea = 52+ 001206 — .119¥ 4 (15) (.00034) (033) + A98(Yes— Vis), of = 033. (081) ‘There are 110 observations in the regression. The numbers in parentheses are the quantities output as “standard errors” by the regression program. On the basis of the results of Fuller, the statistic (n ~ p)(@— 1)(1 +)", where 4 is the coefficient of ¥;1 and p is the number of parameters estimated, is approximately distributed as 431 (3, ~ 1). Also the “t statistic” constructed by dividing the coefficient of ¥;-1 by the regression standard erro: approximately distributed as #,. For this example we have (n= GDA + ay = 106(—.119)(.502)' = —25.1 and 4 = (.033) Both statisties lead to rejection of the null hypothesis of 4 unit root at the 5 percent level if the alternative hy- pothesis is that. both roots are less than one in absolute value. The Monte Carlo study of Section 4 indicated that tests based on the estimated » were more powerful for tests against stationarity than the # statisties. In this example the test based on 4 rejects the hypothesis at a smaller size (.025) than that of the # statistic (05). (- 119) = -3.61 . [Received November 1976. Revised November 1978.) REFERENCES Anderson, ‘Theodore W. (1959), “On Asymptotic Distributions of Estimates of Parameters of Stochastic Difference Equations,” Annals of Mathematical Statistice, 30, 675-687. Box, George E:P, and Jenkins, Gwilym M. 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