KPSS Unit root testing (Applied Econometrics)

 ■ KPSS test

This test was introduced by the econometrics Kwaisoski, Phillips, Schmidt and Shim so the name was regarded in KPSS test.

This test is quite different from from the Augmented Dicky Fuller Test and Phillip Perron Test. In both the ADF and PP Ho is the process is non stationary and the Ha is stationary.

Now we compare the results with KPSS from PP and ADF.

□ ADF/PP

Ho: Yt = I (1)

Ha: Yt = I (0)

□ KPSS

Ho: Yt = I (0)

Ha: Yt = I (1)

The possible outcomes are follows:

a) Reject Ho and Do not reject Ho.

b) Do not reject Ho and Reject Ho.

c) Reject Ho and Reject Ho.

d) Do not reject Ho and Do not Reject Ho.

Now the last two outcomes are contradictory, 1st two outcomes are consisting. ADF/PP will give us result as unstationary whereas the KPSS would give as stationary.

In such a cases a solution is confirmatory data analysis as suggested in literature.

So, this is the KPSS test.

Thank You

Aditya Pokhrel

MBA, MA Economics, MPA