Testing for strict stationarity in a random coefficient autoregressive model

Abstract

We propose a procedure to decide between the null hypothesis of (strict) stationarity and the alternative of nonstationarity, in the context of a random coefficient autoregression (RCAR). The procedure is based on randomizing a diagnostic which diverges to positive infinity under the null, and drifts to zero under the alternative. Thence, we propose a randomized test which can be used directly and—building on it—a decision rule to discern between the null and the alternative. The procedure can be applied under very general circumstances: albeit developed for an RCAR model, it can be used in the case of a standard AR(1) model, without requiring any modifications or prior knowledge. Also, the test works (again with no modification or prior knowledge being required) in the presence of infinite variance, and in general requires minimal assumptions on the existence of moments.