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LOCAL ASYMPTOTIC POWER OF THE IM-PESARAN-SHIN PANEL UNIT ROOT TEST AND THE IMPACT OF INITIAL OBSERVATIONS

Published online by Cambridge University Press:  13 August 2009

David Harris ,
David I. Harvey ,
Stephen J. Leybourne  and
Nikolaos D. Sakkas
David Harris
Affiliation:
University of Melbourne
David I. Harvey
Affiliation:
University of Nottingham
Stephen J. Leybourne*
Affiliation:
University of Nottingham
Nikolaos D. Sakkas
Affiliation:
University of Manchester
*
*Address correspondence to Stephen J. Leybourne, School of Economics, University of Nottingham, University Park, Nottingham NG7 2RD, United Kingdom; e-mail: [email protected].
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Abstract

In this note we derive the local asymptotic power function of the standardized averaged Dickey–Fuller panel unit root statistic of Im, Pesaran, and Shin (2003, Journal of Econometrics, 115, 53–74), allowing for heterogeneous deterministic intercept terms. We consider the situation where the deviation of the initial observation from the underlying intercept term in each individual time series may not be asymptotically negligible. We find that power decreases monotonically as the magnitude of the initial conditions increases, in direct contrast to what is usually observed in the univariate case. Finite-sample simulations confirm the relevance of this result for practical applications, demonstrating that the power of the test can be very low for values of T and N typically encountered in practice.

Type
NOTES AND PROBLEMS
Information
Econometric Theory , Volume 26 , Issue 1 , February 2010 , pp. 311 - 324
Copyright
Copyright © Cambridge University Press 2009

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References

REFERENCES

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