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Determining the Order of Differencing in Autoregressive

Processes
a a
David A. Dickey & Sastry G. Pantula
a
Department of Statistics, North Carolina State University, Raleigh, NC, 27695-8203
Published online: 02 Jul 2012.

To cite this article: David A. Dickey & Sastry G. Pantula (1987): Determining the Order of Differencing in Autoregressive
Processes, Journal of Business & Economic Statistics, 5:4, 455-461

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 O 1987 American Statistical Association Journal of Business & Economic Statistics, October 1987, Vol. 5, No. 4

Determining the Order of Differencing in

Autoregressive Processes
David A. Dickey and Sastry G. Pantula
Department of Statistics, North Carolina State University, Raleigh, NC 27695-8203

One way of handling nonstationarity in time series is to compute first differences and fit a model
to the differenced series unless the differenced series also looks nonstationary. In that case,
second- or higher-order differencing is done. To decide if the current degree of differencing is
sufficient, one can look at the autocorrelation function for slow decay. A formal statistical test
for the need to difference further is available if one is willing to assume that at most one more
difference will render the series stationary. In this article, we present a proper sequence of
statistical tests that allows the practitioner to handle cases in which a high order of differencing
may be needed. The proper sequence is not the traditional sequence, which begins with a test
for a single unit root.
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KEY WORDS: Nonstationarity; Unit root tests.

1. INTRODUCTION the relationship of unit roots to the effect that monetary

The question of how much differencing is appropriate
in time series modeling has received quite a bit of at-
tention recently. On one hand, there is a series of ar-
ticles that say that if one fits a model in which the data
have not been properly differenced, then the effect on
forecasts is not very serious. For example, the results
of Dickey and Fuller (1979) and Tiao and Tsay (1983)
indicated that distributional properties of autoregres-
sive estimates are the same in the limit whether unit
roots are differenced out of the model or simply esti-
mated. Fuller and Hasza (1980) showed the same type
of results for short-term forecasts, and Fuller (1986)
gave an algorithm for estimation that did not depend
on the location of the roots. Chan and Wei (1986) also
discussed this general case. Harvey (1981, p. 181) sug-
gested that overdifferencing is not a problem as far as
forecasting is concerned. Harvey discussed theoretical
models, however, and did not address the effects of
estimating the parameters. Essentially these articles
say that overdifferencing is compensated by moving-
average parameters and underdifferencing by auto-
regressive parameters. Overdifferencing a series with
stationary autoregressive parts, however, leads to a non-
invertible mixed model and thus to potential for
convergence problems in the estimation algorithms.
Although determining the correct order of differenc-
ing is not crucial for forecasting, there appear to be uses
for unit-root tests in investigating some economic hy-
potheses. Unit-root tests have been used to investigate
an equilibrium hypothesis for wage movements (Altonji
and Ashenfelter 1980). Meese and Singleton (1982) ap-
plied unit-root tests to exchange rates and discussed the
importance of unit-root testing in the theory of linear-
ized expectations. Nelson and Plosser (1982) discussed
disturbances have on macroeconomic series.
The order of differencing is often determined in prac-
tice by visual inspection of the autocorrelation function
(ACF) and data plots. The usual procedure is to dif-
ference if the ACF dies off slowly, then to inspect the
ACF of the differenced series for indications of re-
maining unit roots. Recently statistical tests for unit
roots, sometimes referred to as Dickey-Fuller tests,
have been developed [see Dickey, Bell, and Miller (1986)
for a review and list of references]. These tests assume
that there is at most one unit root in the process. The
relationship of the tests to visual inspection of the ACF
is analogous to the relationship between regression tests
of linear dependence and visual inspection of scatter-
plots. The tests simply make the procedure less sub-
jective without eliminating visual inspection as a useful
tool. The tests are helpful in deciding close-call situa-
tions.
Suppose a practitioner uses a sequence of unit-root
tests in the same order as with visual inspection of the
ACF. He would first test for a unit root in the series
levels. If the hypothesis of the presence of a unit root
were not rejected, he would then test the differences
for the presence of a second unit root and so on. We
refer to this as the "standard" testing sequence. Since
the Dickey-Fuller test is based on the assumption of at
most one unit root, at least the first few tests in this
sequence would not be theoretically justified if the se-
ries had more than one unit root. We will show that
performing the tests in a different order allows one to
stand on a firm theoretical ground.
To study the practical effect of using the Dickey-
Fuller test in the presence of additional unit roots, we
considered a third-order autoregressive process. In a
simulation study, we have generated 10,000 series, each
 456 Journal of Business & ~conomicStatistics, October 1987
LOANS
188
90
88
70
88
58
48
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I I
JAN73 MAR75 IIAY77
DATE
Figure I. Real Estate Loans.
of length 50, for several parameter configurations. We
have recorded the number of times that a 5%-level
Dickey-Fuller criterion rejects the (null) hypothesis (HI)
of exactly one unit root and two stationary roots in favor
of the (alternative) hypothesis (Ho) of three stationary
roots. When the process really had three unit roots (H3),
the Dickey-Fuller test rejected the null hypothesis (HI)
in favor of stationarity (Ho)9% of the time. Moreover,
when the process had two unit roots and one stationary
root (Hz), the 5%-level test rejected the hypothesis of
exactly one unit root (HI) in favor of stationarity (Ho)
between 5.5% and 7.7% of the time, depending on the
value of the stationary root. Thus the first test in a
"standard" sequence can declare stationarity in the
original levels more than 5% of the time, when in reality
second or third differencing is needed to achieve sta-
tionarity. [Similar results for a second-order autore-
gressive process were studied in detail by Sen (1985).]
We also studied a 5%-level test suggested by Hasza and
Fuller (1979) for testing the (null) hypothesis (Hz) of
two unit roots and one stationary root. This test rejected
the (null) hypothesis Hz [in favor of one unit root and
two stationary roots (H,)] 9.2% of the time when the
process really had three unit roots (H3). Intuitively, we
hope that if there are two or more unit roots, the test
for one unit root will strongly indicate that the process
Table 1. Regression Out~utfor Real Estate Data
Parameter
Variable df estimate
NOTE: DEL IS the dependent variable, and df represents degrees of freedom.
needs to be differenced, and hence we hope that the
(null) hypothesis HI will be rejected less than 5% of
the time (in favor of stationarity) when there are two
or more unit roots present. Our simulation study does
not support our intuition however. It is still somewhat
comforting to note that the empirical percentiles are
not too far above .05 (less than .I). More details on
the simulation study are given in Section 5.
In this article, we illustrate two sequential proce-
dures, based on extensions of the Dickey-Fuller t sta-
tistics and the Hasza-Fuller F statistics, that have over-
all rejection probability converging to the nominal test
size a as the sample size increases. The procedures are
valid for all d, the order of differencing, and a. We will
also compare the powers of these two sequential pro-
-
cedures using simulation methods.
As a motivating example, consider the data of Pank-
I.
ratz (1983) consisting of 70 consecutive monthly vol-
umes of commercial bank real-estate loans, in billions
of dollars, starting in January 1973. The data are graphed
in Figure 1. Regressing the first difference (DEL) on
the lagged level (Ll) and lagged first differences (DELI,
DEL2) using the SAS (1982) system produces the out-
put shown in Table 1. Now, using table 8.5.2 of Fuller
(1976), we conclude that the series is not stationary. In
fact, the t, statistic 1.265 is greater than even the tab-
ulated 99th percentile (.67 from the table), so we would
strongly reject the unit-root hypothesis in favor of ex-
plosive nonstationarity (a root greater than 1) if we were
willing to entertain that as a possibility. Sen (1985),
however, showed that if there really are two unit roots,
then the 95th percentile of t, is 2.11 (Sen 1985, p. 147).
Thus if the process actually has more than one unit root,
the test that we have just performed is not valid. The
question now facing us is this: If we suspect that there
may be more than one unit root, is there a valid simple
procedure for testing? We will show that a sequential
test, using Fuller's tables, is valid, but that the order of
testing should begin with the highest (practical) degree
of differencing and work down toward a test on the
series levels rather than starting, as we have just done,
with the levels test and working up through the differ-
encing orders. In our real-estate example, we will start
with a test for a third difference and work our way down
(see Sec. 4).
In Section 2 we establish the general models and tests,
including both t- and F-type statistics. In Section 3 we
present distributional properties of the tests and argue
Standard T for H,:
error parameter = 0 Prob. > IT1

for the correct testing sequence. In Section 4 we dem-
onstrate the correct testing procedure on the real-estate
loans example, and in Section 5 we compare the various
proposed tests in terms of power. Section 6 is a sum-
mary.
2. MODELS AND HYPOTHESES
Let the time series {Y,} satisfy
where {eJ is a sequence of iid random variables with
mean 0 and variance a2.For the statistics considered
in this article, without loss of generality, we assume that
a2 = 1 and that Y-,+, = ... = Yo = 0. To keep the
presentation simple, we restrict ourselves to the case
p = 3. Extensions for p > 3 are immediate.
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Let ml, rn,, and m3 denote the roots of the charac-
teristic equation
Assume that 1 r lmll r Im21 2 Im31. Consider the fol-
lowing four hypotheses: (a) Ho: lmll < 1; (b) HI: ml =
1, Im21 < 1; (c) H2: m1 = mz = 1, Im31 < 1; and (d)
H3:rn, = rn, = rn, = 1. That is, under the hypothesis
Hd, the dth difference of Y, is essentially stationary.
Now consider a reparameterization of model (2.1):
where Z, = Y, - Y ,-,, W, = Z, - Z,-l, and X, = W,
- W,-,. Note that Z,, W,, and X, are first, second, and
third differences of the sequence Y,, respectively. It is
easytoseethat a, = 3 + 8, + J2 + & , a 2 = -(3 +
e2 + 2e3), and a, = 1 + e3and that 8, = - (1 - ml)(l
- m2)(1 - m3), O2 = -2e1 - (1 - ml)(l - rn2) -
(1 - m2)(l - rn3) - (1 - rn3)(l - ml), and e3 =
rn,rnzm3 - 1. Therefore, the hypothesis H3 becomes
H3: 0, = 8, = 0, = 0; the hypothesis Hz becomes HZ:
8, = O2 = 0, O3 < 0; the hypothesis H1becomes H1:81
= 0, OZ < 0 (and - 2 < e3 < 0, 0 < 4 + B2 + 203);
and the hypothesis Ho becomes H,: el < 0 and some
restrictions on O2 and e3(e.g., - 12 < 82 + 201 <0, -2
< e3 < 0, etc.). The reparameterization (2.3) is useful
in the sense that the hypotheses regarding the unit roots
can be tested using the usual regression tests for the 6'
parameters in (2.3).
Given n observations, regress X, on Ye,, AZ,-l, and
W,-t to get the least squares estimates e l , 82, and e3
and the corresponding t statistics t1,,(3), t2,,(3), and t3.,(3).
Dickey and Fuller (1979) considered the problem of
testing the hypothesis H1of exactly one unit root. Their
criterion was to reject H1in favor of Hoif the regression
t statistic, t1,,(3), for testing 0, = 0 is less than r,,,, the
empirical 1 O O a percentile of the t statistic under H1.
The values of r,,, are given in table 8.5.2 of Fuller
(1976). Hasza and Fuller (1979) considered the problem
of testing the hypothesis Hz of exactly two unit roots.
Dickey and Pantula: Order of Differencing 457
Their criterion was to reject H2 (which is usually taken
to mean in favor of H,) if the regression F statistic,
F2,,(3), for testing 0, = O2 = 0 is greater than F2,,(2,
a),the empirical 100(1 - a ) percentile of the Fstatistic
under the hypothesis H2. The values of F2,,(2, a ) were
given by Hasza and Fuller (1979).
As mentioned in Section 1, Sen (1985) observed em-
pirically that under the hypothesis H2 of exactly two
unit roots, the Dickey and Fuller (1979) criterion rejects
Hl with probability slightly greater than a . That is, we
are more likely to conclude that the process is stationary
when there are really two unit roots present than when
there is exactly one unit root. Thus we want to avoid
testing for one unit root (d = 1) before we test for a
higher number (d > 1) of unit roots; that is, we do not
want to test for a single unit root until we have elimi-
nated the possibility of a higher number of unit roots.
Of course, we can only test for this possibility, not
eliminate it with certainty. Pantula (1986a) observed
similar results for the t and the F statistics under the
hypothesis H,. Pantula (1986b) derived the asymptotic
distributions for each of the regression F statistics, F1,,(3),
F2,,(3), and F3,,(3) under the hypothesis H, (i = 0, 1,
2,3), where Fl,,(3) denotes the regression F statistic for
testing 0, = .-.= Bi = 0 in a third-order autoregressive
process. He showed that, under the hypothesis H, of
exactly d unit roots, (a) the F statistic F,,,(3) converges
in distribution to a random variable F,(d) for i 5 d, and
(b) it diverges to infinity for i > d. Based on these
results he suggested testing the hypotheses sequentially
in the order H3, HZ,and HI:
1. Reject H3: el = OZ = O3 = 0 and go to step 2 if
F3,,(3) > F3,,(3, a); otherwise, conclude that H3is true.
2. Reject Hz: el = e2 = 0, O3 < 0 and go to step 3
if, in addition to F3,,(3) > F3,,(3, a), you also find that
F2,,(3) > F2.,(2, a); otherwise, conclude Hz.
3. Reject HI: el = 0, 0, < 0 in favor of Ho: 8, < 0
(and some restrictions on 8, and 0,) if Fi,,(3) > FJi,
a ) for i = 1, 2, 3, where Fi,,(i, a ) are the empirical
percentiles given by Pantula (1986a). Note that the
regression F statistics can be computed using the se-
quential sums of squares in the regression of X, on w,- t ,
21-19 yr-1.
For testing the hypothesis H,: 8, = e2 = d3 = 0
against the alternative H,: 8, = e2 = 0, B3 < 0, the
criterion based on the F statistic F3,,(3) does not take
into account the one-sided nature of the alternative
hypothesis. Similarly, the F statistics for testing H2ver-
sus Hl and Hl versus H,, are two-sided in nature. Be-
cause of the one-sided nature of the alternatives, we
may be able to increase the power by considering a one-
sided criterion.
In Section 3, we indicate why the use of the regression
t statistics ti,,(3) (i = 1, 2, 3), in the regression of X,
on Y,-I , Z,-, , and W,-, may not be appropriate, and
we suggest a sequential procedure based on pseudo t
 458 Journal of Business & Economic Statistics, October 1987
statistics t&(p), where t,?,(p) is the regression t statistic
for the coefficient of (1 - B)'-'Y,-, in the regression
of (1 - B)PYl on (1 - B)i-lYl-l, (1 - BYY,-,, . . . ,
(1 - B)P-'Y,-, and B is the back-shift operator. Note
that under the (null) hypothesis Hi and the (alternative)
hypothesis H,-,, we have 8, = -.- = Oi-, = 0, so we
compute the t statistics by restricting el, . . . , 8,-, to
be 0.
3. MAIN RESULTS
We consider the ordinary least squares regression of
X, on Y,-,, 2,-,, and W,-I for the model (2.3). In the
following theorem, we present the asymptotic distri-
bution of the usual t statistics under various possible
hypotheses.
Theorem 1. Suppose that the model (2.3) holds with
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{eJ a sequence of iid(0, 02) random variables. Let ti,,(3)
(i = 1, 2, 3) denote the regression t statistic for testing
the hypothesis that 8, = 0. Then, under the hypothesis
Hd
tl,,(3) ti(d) for i Id
and
P
n-1'2ti,n(d)+ cOi, i > d,
where c is a positive constant,
f;(d) = ~d-i+l(~~-i+l)1'2,
- Hi, &(3) 2 f = t,(l) = Slzfi"' (i = 1,2,3); (b) under
0, = ith element of xi1r d ,
oi = (i, i)th element of x;',
Ed = ((ojj)) : d x d matrix,
and Ho(t) is a standard Brownian motion.
Proof. See Pantula (1986b).
The problem with applying this result is that the t
statistic tl,#) for testing one unit root has different
asymptotic distributions depending on the number of
unit roots present. We will now indicate why a sequen-
tial procedure based on the t statistics, in which we test
the hypothesis H3 first, then the hypothesis Hz, and
finally the hypothesis H,, is not consistent. Note that
under the hypothesis Hd, the coefficient Od+l is negative
and hence the t statistic td+,,J3) diverges to negative
infinity. It is possible, however, that 8, = 0 for some i
> d, in which case the t statistic ti,J3) converges in
distribution to N(0, 1). For example, if m, = m2 = m3
= -.5, then B1 = -3.375, B2 = 0, and e3 = -1.125,
and the t statistic t2,n(3)converges in distribution to N(0,
1). Moreover, if m, = m2 = m3 = -.75, then 8, =
- (1.75)3, O2 = .5(1.75)2, and O3 = - 1 - (.75)3. In
this case, the process is stationary and the t statistic
t2,,(3) diverges to + infinity. These two examples in-
dicate that a sequential procedure based on the t sta-
tistics ti,J3) will not be consistent.
As a motivation for our next theorem, consider test-
ing the null hypothesis H3: 8, = O2 = $ = 0 against
the alternative Hz:8, = O2 = 0, d3 < 0. Note that under
the null and the alternative hypotheses we have 8, =
8, = 0. This suggests that an appropriate test is obtained
by considering the t statistic t 3 3 ) in the regression of
X, on W,-,. Similarly, if we wish to test the hypothesis
Hz: 8, = 8 2 = 0, 8, < 0 against the alternative H I : 8,
= 0, 82 < 0, we regress X, on 2,-Iand W,-l and use
the t statistic t;,,(3) for testing that the coefficient of
2,-,is 0. Moreover, let t1,,(3) = tl,J3), where tl,J3) is
as defined in Theorem 1.
We now present the asymptotic distributions of the t
statistics t 3 3 ) under the hypothesis Hdfor d = 1, 2, 3
and i = 2, 3.
Theorem 2. Suppose the process Y,satisfies the con-
ditions of Theorem 1. Then (a) under the hypothesis
the hypothesis H3, tZn(3) -, f3tp(oH)1'2; and (c) under
the hypothesis Hd, n-1'2tfn(3) + a negative constant,
for i > d, where 8; = the last element of Z1'T2, o:, =
the (2,2)th element of x ~ land r2
, Z2and are as defined
in Theorem 1.
Proof. See Pantula (1986b).
We now propose the following sequential procedure
for testing the hypotheses:
1. Reject the hypothesis H3of three unit roots and
go to step 2 if t;,,(3) If ,,,, where ?,,, was given by
Fuller (1976).
2. Reject the hypothesis Hzof exactly two unit roots
and go to step 3 if in addition to t;,,(3) 5 ?, you also
find that t;,, (3) 5 f,.,.
3. Reject the hypothesis H, of exactly one unit root
in favor of the hypothesis Hoof no unit roots if tjrn(3) 5
?, (i = 1, 2, 3).
From Theorem 2 it follows that
lim PHd[rejectingthe hypothesis Hi]
n--
Therefore, the sequential procedure suggested previ-

ously is a consistent level-a procedure. Moreover, if we
let 2, be the estimator of do = the true number of unit
roots present, where 2, is obtained from the preceding
sequential procedure, then 'it follows from Theorem 2
that
lim P,,[& = d] = 1 - a, d = do
n- p
for do > 0 and pH,,[da= 0] converges to 1. In the real-
estate loan example, we will reject the hypothesis d =
3 but not the hypothesis d = 2, so 2, = 2.
In Section 5 we compare the sequential P procedure
with the sequential F procedure given in Section 2.
4. EXAMPLE REVISITED
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The following regression models are fit to the real-
estate loan data from Section 1. Note that the inclusion
or exclusion of an intercept affects the choice of critical
values for the test statistic. Use the T tables of Fuller
(1976) if no intercept is used and the t, tables if the
model includes an intercept. The fitted models, with t
statistics listed below the parameter estimates are as
follows:
Model 1.
V3 Y, = .0233 - 1.3633 V2Y,-1.
test statistic = (.645)(- 11.762)
Model 2.
V3 Yr = -1.3596 V2Yr-1.
test statistic = ( - 11.795)
Model 3.
V 3 Y r = .0690 -.799VY,-I
test statistic = (1.265) ( - 1.091)
-1.3180 V2 Yr-1.
( - 10.718)
Model 4.
V3 Y, = -.0098 VYt-l -1.3532 V2 Yr-i.
test statistic = ( - .206) ( - 11.251)
Model 5.
V 3 Y r = -.2845 + .0062Yr-,
test statistic = ( - .999) (1.265)
- .799 VY,-, - 1.3180 V2 Y,-l.
( - 1.616) ( - 10.349)
Following the approach outlined in Section 3, we
begin the testing procedure at step 1 or 2. In either
case, compared to the 7 or the r, tables of Fuller (1976),
the hypothesis that the third difference is nonstationary
is rejected. Third differencing has produced stationar-
ity, but can we get by with less than a third difference?
To answer this, we move to Model 3 or 4 to test the
second differences. Here we do not reject the null hy-
pothesis and the testing stops. The crucial point is that
Dickey and Pantula: Order of Differencing 459
we stopped before even considering Model 5, the pos-
itive coefficient (.0062) and t statistic (1.265) of which
might have misled us to believe that the process is ex-
plosive. As for the inclusion of an intercept term, we
suggest always including the intercept when the alter-
native is stationarity in the levels (Model 5), because
most real data are either nonstationary or have a non-
zero mean. For this data set there is little evidence of
drifting once a first difference is taken [see Dickey and
Fuller (1981) for a discussion of the distribution of the
intercept term in the presence of a unit root], so we
prefer Models 2 and 4 to Models 1 and 3. Moreover,
if one uses the sequential F procedure suggested in
Section 3, one gets F3,,(3) = 47.29 and F2,70(3)= 1.19,
and hence one arrives at the same conclusions as the
sequential t* procedure.
The model finally chosen is model (4), which can be
written as
V2 Y, = - .36V2Y,-1 + e,.
Notice that in fact we could have used V2Y, as the de-
pendent variable in Models 3 and 4 and VY, in Model
5 without changing the computed t statistics that are
used for testing stationarity. Some of the other t statis-
tics would be changed under this reparameterization.
For this example, both the "standard" procedure (not
allowing for explosive roots) and our procedure would
lead to the same final model. But, under the hypothesis
of two unit roots, the first test (in the levels) of the
"standard" procedure is not valid.
5. POWER STUDY
In Section 2 we developed sequential testing proce-
dures based on t- and F-type statistics. In this section,
we report the results of a Monte Carlo power study in
which 10,000 series, each of length 50, were generated
for each of several parameter configurations. The pa-
rameters are computed from the triplets of roots listed
in the left column of Table 2. The number of rejections
of various sets of hypotheses using 5%-level tests are
reported in the body of the table. To see how the table
is interpreted, consider the roots 1, 1, and .7 used in
the fifth and sixth rows of the table. Here a correct
decision would be that the series has two unit roots.
The F-type test rejected H35,696 times, but t* rejected
it 9,504 times. Since H3is false, this shows t* to be more
powerful than F. Of the 5,696 rejections of H3, 293 of
them also rejected Hzusing the F test. This left 5,696 -
293 cases in which F caused the correct decision (two
unit roots) to be made. The t* test gave the correct
decision 9,041 times. The number of rejections of both
H2 and Hj was 463 for t*, which is fairly close to the
500 rejections we would expect from result (3.1) for
large n. For this particular line of the table, the t* sta-
tistic caused overdifferencing and underdifferencing
about equally often, but the F caused overdifferencing
4,304 times and underdifferencing only 293 times.
 460 Journal of Business & Economic Statistics. October 1987
Table 2. Power Study of 10,000 Replications, Series Length N = 50
- -- ---
Reject Reject
Roots H3 Hz, H3
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NOTE: The top line of each set represents the F-type test; the bottom line represents the t* test.
The general conclusion to be drawn is that the t*
procedure is quite a bit more powerful than F i n most
cases; therefore, we suggest the use oft* rather than F
in practice.
The significance levels are affected quite a bit by
nuisance parameters in the length-50 case. By this we
mean that the number of rejections of the true hypoth-
esis concerning d varies as a function of the other roots.
The entries of the table to which we refer are rows 1
and 2 of column 1, rows 3-8 and 35-36 of column 2,
and rows 9-16,31-34, and 37-38 of column 3. In most
cases the empirical levels drop below the .05 target,
getting as low as .0068 in one case with no roots outside
the unit circle and going even lower for roots exceeding
1. Since the significance level gives the probability of
underdifferencing, the low values would be acceptable
to a practitioner who would rather overdifference (or
correctly difference) than underdifference.
Reject Conclude Conclude Conclude
HI, Hz, H3 H1 Hz H3
All tests display low power for the cases considered
with roots larger than 1. It is somewhat surprising that
the t* test has power exceeding that of F in some of
these cases. It is also somewhat disappointing that the
entry in column 1, row 2, is not closer to 500, since
there are no nuisance parameters involved here.
6. SUMMARY
The results of this article are easy to summarize. Among
several methods for sequential testing of unit roots,
there is clearly an outstanding one. This is the t* test
that compares a null hypothesis of k unit roots with an
alternative of k - 1unit roots. The test is a clear winner
in terms of both simplicity (it uses existing r tables) and
power. In the sequential procedure, one should start
with the largest k under consideration and work down;
that is, decrease k by one each time the null hypothesis

is rejected. Upon acceptance of a null hypothesis, the
procedure stops.
ACKNOWLEDGMENTS
We wish to thank Dennis Boos, Ron Schrimper, and
the referees for their comments. This work was partially
funded by National Science Foundation Grant DMS-
8406372 A01.
[Received January 1986. Revised January 1987.1
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