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HOW TO RUN UNIT ROOT TEST USING E-VIEWS SOFTWARE

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ABSTRACT

Unit-root testing strategies are unnecessarily complicated because they do not exploit prior knowledge of the growth status of the time series, they worry about unrealistic outcomes, and they double- or triple-test for unit roots. The authors provide a testing strategy that cuts through these complications and so facilitates teaching this dimension of the unit-root phenomenon. F tests are used as a vehicle for understanding, but t tests are recommended in the end, consistent with common practice.

Shock is usually used to describe an unexpected change in a variable or in the value of the error terms at a particular time period. When we have a stationary system, effect of a shock will die out gradually. When we have a non-stationary system, effect of a shock is permanent.

•      Two types of non-stationarity:

Unit root i.e.,|bi| = 1: homogeneous non-stationarity

|bi| > 1: explosive non-stationarity

Shock to the system become more influential as time goes on.

A root near 1 of the AR polynomial                Þdifferencing

A root near 1 of the MA polynomial                Þover-differencing

STEPS IN TESTING FOR UNIT ROOT USING E-VIEWS

 First, download the excel formatted data file named “US_cpi_data” from the “Sample Data” of

Econ3600 homepage.

Second, open the EVIEWS program and click “file”, “new”, and “workfile”, then the “Workfile

Range” window will be appeared as following. Choose to highlight “Monthly” (because the

series is a monthly sample data) and types the dates for “Start date” and “End date” in the

dialogue box to specific the starting and ending of the sample.

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