1. weak stationarity

AUGMENTED DICKEY FULLER (ADF) TEST

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AUGMENTED DICKEY FULLER (ADF) TEST

One of the problems with the DF test is serial correlation. One solution to this is to add lagged differences on the rhs to generate an augmented Dickey Fuller test(ADF)

Even if the underlying DGP has MA terms, with the correct number of differenced AR terms any general ARMA(p,q) process can be adequately approximated to ensure that et is white noise
Choosing the number of differenced AR terms is critical since:
- Too few may result in over-rejection of the null of non-stationarity when it is true
- Too many may reduce the power (under-rejection of the null of non-stationarity when the alternative is true)
Said and Dickey (1984) suggest a maximum number of INT() should be tested, where T is the number of observations. INT is integer.

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