Estimation of a Noninvertible Moving Average Process
The Case of Overdifferencing
University of Rochester, Rochester, NY 14627
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Econometrics, 6 (September 1977) 199-224
The effect of differencing all of the variables in a properly specified
regression equation is examined. Excessive use of the difference
transformation induces a non-invertible moving average (MA) process in
the disturbances of the transformed regression. Monte Carlo technniques
are used to examine the effects of overdifferencing on the efficiency of
regression parameter estimates, inferences based on those estimates, and
tests for overdifferencing based on the estimator of the MA parameter for
the disturbances of the differences regression. Overall, the problem of
overdifferencing is not serious if careful attention is paid to the
properties of the disturbances of the regression equations.
Key words: Overdifferencing, ARIMA, Unit root
JEL Classifications: C22
Cited 49 times in the SSCI through April 1996
© Copyright 1977, Elsevier
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