Philip Perron Unit Root Testing (Applied Econometrics)

■ Philip Perron (PP) Unit Root Testing

This test was introduced in 1988 A.D.

As we know that the Dicky Fuller test is basee upon the three assumptions:

a) Et ~ i.i.d (0,sigma^2)

b) There must be no Serial Correlation

c) Variance ougut to be similar.

Now in the dicky fuller test, the serial correlation is taken into account by adding the difference test, that is by adding deltaYt-1, deltaYt-2, ..., delta Yt-3 that's by augmenting the original model.

The PP test uses the non parametrical statistical method to take account of serial correlation without adding any lagger differences. 

PP is identical to ADF test with the exception that is a non parametric procedure used to take into account the problem of Serial Correlation without adding the lagged differences to the original equation and PP test makes  correction for Tauhat coefficients of gamma i.e. Gamma tends to Tauhat to take account of the correlation in Et.

If there's correlation in Et the Gamma becomes inefficient so this correction of the Gamma tends to Tauhat is made in the PP test without adding any augmented terms.

So, the euquation for PP test is identical to Dicky fuller test, it's not identical to the Augmented because the Augmented terms are not there.

Thank You

Aditya Pokhrel

MBA, MA Economics, MPA