Unit roots and their tests

The article gives an up to date survey on the unit root problem. First, it smmarizes the basic concepts of stochastic time series analysis underlining the contradictions of the stationarity assumption and the tests of stationarity. Then it exposes the unit root problem in economic time series and its relation to the cointegration and econometric model building. For the simplest processes and models Dickey-Fuller tests are analyzed in details and their practical application is demonstrated by a simple example of the Budapest Exchange Stock. Unit root tests for more sophisticated processes are treated in a less detailed way. Among the further problems of the unit root literature seasonal and fractional integration, nearly integrated and local trend processes, the unobservable component models and the general regression models are briefly mentioned. As a conclusion, the study shows that even the most complex models seem to be too simple to describe the movement of the main macro indicators of the Hungarian economy in the period of transition. So further research in this field seems to be inevitable.