ADF & Order of Integration Flashcards
What ADF test?
The Augmented Dickey-Fuller test is used to check whether a time series is stationary or has a unit root (non-stationary)
What are the null and alternative hypotheses in the ADF test?
H0: γ = 0 (unit root)
H1: γ < 0 (stationary)
What is the test equation for the ADF test?
ΔYt = a + γYt-1 + ∑δi ΔYt-i + ut
ΔYt = First difference of the series
𝛾 = The key coefficient - testing whether its 0
∑δi ΔYt-i =Lagged differences to fix autocorrelation
What does I(1) mean?
The series becomes stationary after 1 difference
What table should you use to interpret the ADF test statistic?
Dickey-Fuller critical value table (not standard t-table)
Stationary series I(0)
A time series with constant mean, variance, and autocovariance
When should you take first differences?
When the series is non-stationary (e.g. has a unit root) and is 𝐼(1)
Why are lagged differences included in the ADF test?
To control for autocorrelation and ensure the error term is white noise.
What are the null and alternative hypotheses of the Dickey-Fuller test?
H0:ρ=1 (unit root),
H1:∣ρ∣<1 (stationary)