Essentials of Time Series for Financial Applications

Example 8.2

In Chapter 4, we concluded that monthly US aggregate dividends and earnings contain a unit root with reference to a long, 1871:01–2016:12 sample. In this example, we examine whether such a conclusion from standard ADF tests may have been contaminated by the presence of at least one break in the time series.

As a first step, we copy in Table 8.3 the results from standard ADF tests that assume the absence of breaks in both the drift and, if any, the trend of the series. For both series, and under a variety of choices concerning the specification of the model and the selection and the number of lags, we conclude that both series are nonstationary.

Table 8.3

Results of Standard ADF Tests Applied to Aggregate US Dividends and Earnings ...