Skip to main content Accessibility help
×
Home
Hostname: page-component-7ccbd9845f-l8x48 Total loading time: 0.328 Render date: 2023-01-27T18:53:42.221Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

PANEL UNIT ROOT TESTS WITH CROSS-SECTION DEPENDENCE: A FURTHER INVESTIGATION

Published online by Cambridge University Press:  04 November 2009

Jushan Bai*
Affiliation:
Columbia University
Serena Ng
Affiliation:
Columbia University
*
*Address correspondence to Jushan Bai, Department of Economics, Columbia University; 1022 IAB, 420 West 118th Street, New York, NY 10027, USA; e-mail: jushan.bai@columbia.edu.

Abstract

An effective way to control for cross-section correlation when conducting a panel unit root test is to remove the common factors from the data. However, there remain many ways to use the defactored residuals to construct a test. In this paper, we use the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) residuals to form two new tests. One estimates the pooled autoregressive coefficient, and one simply uses a sample moment. We establish their large-sample properties using a joint limit theory. We find that when the pooled autoregressive root is estimated using data detrended by least squares, the tests have no power. This result holds regardless of how the data are defactored. All PANIC-based pooled tests have nontrivial power because of the way the linear trend is removed.

Type
ARTICLES
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Anderson, T.W. (1984) An Introduction to Multivariate Statistical Analysis. Wiley.Google Scholar
Bai, J. (2003) Inferential theory for factor models of large dimensions. Econometrica 71, 135172.CrossRefGoogle Scholar
Bai, J. & Ng, S. (2002) Determining the number of factors in approximate factor models. Econometrica 70, 191221.CrossRefGoogle Scholar
Bai, J. & Ng, S. (2004) A PANIC attack on unit roots and cointegration. Econometrica 72, 11271177.CrossRefGoogle Scholar
Breitung, J. & Das, S. (2008) Testing for unit root in panels with a factor structure. Econometric Theory 24, 88108.CrossRefGoogle Scholar
Chang, Y. (2002) Nonlinear IV unit root tests in panels with cross-section dependency. Journal of Econometrics 110, 261292.CrossRefGoogle Scholar
Chang, Y. & Song, W. (2002) Panel Unit Root Tests in the Presence of Cross-Section Heterogeneity. Manuscript, Rice University.Google Scholar
Choi, I. (2006) Combination unit root tests for cross-sectionally correlated panels. In Corbae, D., Durlauf, S.N., & Hansen, B.E. (eds.), Econometric Theory and Practice: Frontiers of Analysis and Applied Research: Essays in Honor of Peter C.B. Phillips, pp. 311333. Cambridge University Press.Google Scholar
Gengenbach, C., Palm, F., & Urbain, J.P. (2009) Panel unit root tests in the presence of cross-sectional dependencies: Comparison and implications for modelling. Econometric Review, forthcoming.CrossRefGoogle Scholar
Jang, M.J. & Shin, D. (2005) Comparison of panel unit root tests under cross-sectional dependence. Economics Letters 89, 1217.CrossRefGoogle Scholar
Leeb, H. & Potscher, B. (2008) Can one estimate the unconditional distribution of post-model-selection estimators? Econometric Theory 24, 338376.CrossRefGoogle Scholar
Levin, A., Lin, C.F., & Chu, J. (2002) Unit root tests in panel data: Asymptotic and finite sample properties. Journal of Econometrics 98, 124.CrossRefGoogle Scholar
Maddala, G.S. & Wu, S. (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics 61, 631652.CrossRefGoogle Scholar
Moon, R. & Perron, B. (2004) Testing for a unit root in panels with dynamic factors. Journal of Econometrics 122, 81126.CrossRefGoogle Scholar
Moon, R., Perron, B., & Phillips, P. (2007) Incidental trends and the power of panel unit root tests. Journal of Econometrics 141, 416459.CrossRefGoogle Scholar
Ng, S. & Perron, P. (2001) Lag length selection and the construction of unit root tests with good size and power. Econometrica 69, 15191554.CrossRefGoogle Scholar
O’Connell, P. (1998) The overvaluation of purchasing power parity. Journal of International Economics 44, 119.CrossRefGoogle Scholar
Perron, P. & Ng, S. (1996) Useful modifications to unit root tests with dependent errors and their local asymptotic properties. Review of Economic Studies 63, 435465.CrossRefGoogle Scholar
Perron, P. & Ng, S. (1998) An autoregressive spectral density estimator at frequency zero for nonstationarity tests. Econometric Theory 14, 560603.CrossRefGoogle Scholar
Pesaran, H. (2007) A simple unit root test in the presence of cross-section dependence. Journal of Applied Economics 22, 265312.CrossRefGoogle Scholar
Phillips, P.C.B. & Moon, R. (1999) Linear regression limit theory for nonstationary panel data. Econometrica 67, 10571111.CrossRefGoogle Scholar
Phillips, P.C.B. & Perron, P. (1988) Testing for a unit root in time series regression. Biometrika 75, 335346.CrossRefGoogle Scholar
Phillips, P.C.B. & Ploberger, W. (2002) Optimal Testing for Unit Roots in Panel Data. Mimeo, University of Rochester.Google Scholar
Phillips, P.C.B. & Sul, D. (2003) Dynamic panel estimation and homogeneity testing under cross-section dependence. Econometrics Journal 6, 217259.CrossRefGoogle Scholar
Said, S.E. & Dickey, D.A. (1984) Testing for unit roots in autoregressive-moving average models of unknown order. Biometrika 71, 599607.CrossRefGoogle Scholar
Sargan, J.D. & Bhargava, A. (1983) Testing for residuals from least squares regression being generated by Gaussian random walk. Econometrica 51, 153174.CrossRefGoogle Scholar
Stock, J.H. (1990) A Class of Tests for Integration and Cointegration. Mimeo, Department of Economics, Harvard University.Google Scholar
Westerlund, J. & Larsson, R. (2009) A note on the pooling of individual PANIC unit root tests. Econometric Theory 25, 18511868.CrossRefGoogle Scholar
118
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

PANEL UNIT ROOT TESTS WITH CROSS-SECTION DEPENDENCE: A FURTHER INVESTIGATION
Available formats
×

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

PANEL UNIT ROOT TESTS WITH CROSS-SECTION DEPENDENCE: A FURTHER INVESTIGATION
Available formats
×

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

PANEL UNIT ROOT TESTS WITH CROSS-SECTION DEPENDENCE: A FURTHER INVESTIGATION
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *