Simulation Analysis as a Way to Assess the Performance of Important Unit Root and Change in Persistence Tests

Simulation in Computational Finance and Economics: Tools and Emerging Applications

Data Science
Book Chapter

R. Fernández

J.E. Vera-Valdés




This chapter shows a way to, using simulation analysis, assess the performance of some of the most popular unit root and change in persistence tests. The authors do this by means of Monte Carlo simulations. The findings suggest that these tests show a lower than expected performance when dealing with some of the processes commonly believed to be found in the economic and financial data. The output signals that extreme care should be taken when trying to support a theory using real data. As the results show, a blind practitioner could get misleading implications almost surely. As an empirical exercise, the authors show that the considered test finds evidence of a unit root process in the US house price index. Nonetheless, as the simulation analysis shows, extreme caution should be taken when analyzing these results.


The chapter can be downloaded here.