Evaluation Of The Testing Techniques

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4.3 Evaluation of the Testing Techniques 4.3.1 Hypothesis According to Wetcher-Hendricks (2014), the basic principle of hypothesis testing is to make an assumption for the overall characteristics, and then making a judgment about the original hypothesis should be accepted or not, which is based on the statistical inference. Based on the research objective, the general idea of hypothesis testing for PPP started from the null hypothesis, which was expressed as having a unit root. Next, performing t-test, meanwhile, comparing the value of t-statistic with test critical values under the selected confidence interval. When the value of t-statistic was larger than the critical value, the null hypothesis would not be rejected, meaning the existence of the unit root. If the t-statistic value was smaller than the critical value, one rejected the null hypothesis, which implies that the financial time series is stationary. 4.3.2 Unit Root Test The Unit Root Test, also named Augmented Dickey-Fuller Test (ADF Test), is put forward according to whether the macroeconomic datum or financial datum has some special characteristics, which is a particular method to test stationarity of the financial time series (Choi, 2015). To put it simply, testing the unit root is to examine whether there will be a unit root in the analysis of time series or not. The financial time series would be considered as non-stationarity if the unit root exists, which is likely to result in spurious regressions. Due
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