Testing for a unit root in the presence of stochastic volatility and leverage effect

Previous studies have shown that the stationary and nonstationary time-varying volatilities have different implications on the unit root test. In this paper, we provide a Bayesian unit root test for an AR(1) model with stochastic volatility and leverage effect. Monte Carlo simulations show that the proposed Bayesian unit root test statistic achieves good finite sample properties and is robust to the stationarity of stochastic volatility. ► We develop a Bayesian unit root test for AR(1) models with stochastic volatility. ► We illustrate the finite sample performance using simulation studies. ► The results show that it is satisfactory under all scenarios of volatility.