My project is about purchasing power parity (PPP). I am checking whether the real exchange rate of Canadian dollar(CAD)/US dollar(USD), Japanese Yen(JPY)/USD and Great Britain Pound(GBP)/USD has a unit root with Augmented Dickey Fuller (ADF).
- H0 is - there is a unit root for the series and real ex. rate will follow the random walk and is non-stationary
- H1 is - there is no unit root and the real exchange rate is stationary and PPP holds.
I have created a diagram of the real exchange rates over the sample period, unfortunately I can not attach photos, due to the site regulations (I don't have 10 reputation yet) Anyways my JPY ex rate is highly volatile, fluctuates between 1.7 and 2.3 over the period; GBP is giving similar line, only it fluctuates between -0.3 and 0.1; CAD is the one that seems to have stationarity, it is relatively flat, moves between -0.1 and 0.3.
All the critical values are the same for all three results, and only t-statistic and the p-values are different. 1% -3.442; 5% -2.871; 10% -2.570
In Cad/USD t-stat is -1.568 and p-value 0.4997; in JPY/USD t-stat -2.551 and p-value 0.1036; in GBP/USD t-stat is -3.410 and p-value 0.0106
It seems that with the rise of the t-stat result, p-value decreases; moreover my H0 is rejected at 5 and 10% for GBP and is not rejected at 1%. I am really puzzled at how to give the interpretation for that. (Maybe it's because it fluctuates under zero?)
My supervisor wants me to explain what is the connection between t-stat and the p-value. and if possible could you please explain in simple English what is the unit root, mathematical explanations were of no help. I have also read the article Intuitive explanation of unit root already, unfortunately I still could not get the main idea of the unit root