[Journal:] The Open Economics Journal [ISSN:] 1874-9194 [Publisher:] Bentham Open [Place:] Sharjah [Volume:] 2 [Year:] 2009 [Pages:] 71-79
Some researchers, for example, Koop , and Sims , have advocated for Bayesian alternatives to unit-root testing over the classical approach using the augmented Dickey-Fuller test (ADF). This paper studies the power of what Koop  has called the Objective Bayesian approach to unit-root testing. Koop's objective Bayesian test is interesting in light of the call by Phillips [3, 4] for more objective Bayesian analysis of time series. We apply the objective Bayesian unit-root test to a study of long-run purchasing power parity (PPP) in the post-Bretton Woods era and also Monte Carlo simulations. Overall, contrary to the favorable simulation results obtained by Koop , our results suggest that the objective Bayesian test is biased in favor of trend-stationarity. We conclude that, at least for the objective Bayesian test, it is not better than the classical ADF approach in unit-root tests, and because of its bias, the objective priors suggested by Koop  is not appropriate, and we do not recommend its use.
unit-root test objective bayesian test long-run PPP