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ADF Model and Formulae

The Augmented Dickey-Fuller (ADF) test is a unit root test used to test if a time series is stationary. The ADF test extends the Dickey-Fuller test by adding lagged difference terms to account for serial correlation. There are three regression models that can be used for the ADF test: with no constant and no trend, with a constant but no trend, or with a constant and trend. The null hypothesis is that there is a unit root, while the alternative hypothesis is that the time series is stationary. Software like R, Stata, and SAS can perform the ADF test, though it requires more manual steps in Excel. A p-value less than 5%

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204 views

ADF Model and Formulae

The Augmented Dickey-Fuller (ADF) test is a unit root test used to test if a time series is stationary. The ADF test extends the Dickey-Fuller test by adding lagged difference terms to account for serial correlation. There are three regression models that can be used for the ADF test: with no constant and no trend, with a constant but no trend, or with a constant and trend. The null hypothesis is that there is a unit root, while the alternative hypothesis is that the time series is stationary. Software like R, Stata, and SAS can perform the ADF test, though it requires more manual steps in Excel. A p-value less than 5%

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MarkWeber
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ADF — Augmented Dickey Fuller Test

https://www.statisticshowto.datasciencecentral.com/adf-

augmented-dickey-fuller-test/
Unit Roots > AGF Test

What is the Augmented Dickey Fuller Test?


The Augmented Dickey Fuller Test (ADF) is unit root test for stationarity.
Unit roots can cause unpredictable results in your time series analysis.
The Augmented Dickey-Fuller test can be used with serial correlation. The
ADF test can handle more complex models than the Dickey-Fuller test,
and it is also more powerful. That said, it should be used with caution
because—like most unit root tests—it has a relatively high Type I error
rate.

Hypotheses
The hypotheses for the test:
 The null hypothesis for this test is that there is a unit root.
 The alternate hypothesis differs slightly according to which equation
you’re using. The basic alternate is that the time series is stationary
(or trend-stationary).

Choosing Models and Lags

Before you run an ADF test, inspect your data to figure out an


appropriate regression model. For example, a nonzero mean indicates the
regression will have a constant term. The three basic regression models
are:
 No constant, no trend: Δyt = γyt-1 + vt
 Constant, no trend: Δyt = α + γyt-1 + vt
 Constant and trend: Δyt = α + γyt-1 + λt + vt

The Augmented Dickey Fuller adds lagged differences to these models:

 No constant, no trend: Δyt = γyt-1 +  asΔyt-s + vt

 Constant, no trend: Δyt = α + γyt-1 +  asΔyt-s + vt

 Constant and trend: Δyt = α + γyt-1 + λt +  asΔyt-s + vt


You need to choose a lag length to run the test. The lag length should
be chosen so that the residuals aren’t serially correlated. You’ve got
several options for choosing lags: Minimize Akaike’s information criterion
(AIC) or Bayesian information criterion (BIC), or drop lags until the last lag
is statistically significant.

Using Software
Although software will run the test, it’s usually up to you to interpret the
results. In general, a p-value of less than 5% means you can reject the null
hypothesis that there is a unit root. You can also compare the calculated
DFT statistic with a tabulated critical value. If the DFT statistic is more
negative than the table value, reject the null hypothesis of a unit
root. Note: The more negative the DF test statistic, the stronger the
evidence for rejecting the null hypothesis of a unit root.

The DF test statistic:

Source: Fuller, W. A. (1976).

Excel:
Excel doesn’t have a built-in function for the ADF test, but you can run one
on your data using the regression and t-test features in the software. The
steps are not easy to do, and require a lot of formulas (it’s much easier to
do in other software like R or SAS). This PDF, from  Principles of
Econometrics, shows the set up and formulas with clear images (pp. 181-
185).

R
To run ADF in R, use the adf.test function found in the tseries package. It
has many options, including:
 “c” (default): for a regression with a constant but not a time trend,
 “nc”: no intercept, no time trend,
 “ct”: intercept and time trend.
Other options in R include nsdiffs in the forecast package and adfTest in
the fUnitRoots package.

Stata:
Use dfgls or dfuller.

SAS:
Run an ADF test in PROC ARIMA.
References:
Fuller, W. A. (1976). Introduction to Statistical Time Series. New York: John
Wiley and Sons. ISBN 0-471-28715-6.
Ogunc, A. & Hill, C. (2008) Using Excel: Companion to Principles of
Econometrics, Third Edition. Retrieved January 4, 2017 from:
http://econweb.tamu.edu/hwang/CLASS/Ecmt463/Lecture
%20Notes/Excel/Excel_Lessons.pdf

Important Website for Writing:

http://rizaudinsahlan.blogspot.com/2016/08/

https://www.statisticshowto.datasciencecentral.com/adf-
augmented-dickey-fuller-test/

https://faculty.fuqua.duke.edu/~rnau/Decision411_2007/411seart.
htm

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