Hostname: page-component-586b7cd67f-dlnhk Total loading time: 0 Render date: 2024-11-22T04:25:04.240Z Has data issue: false hasContentIssue false
  • English
  • Français

TESTING FOR UNIT ROOTS IN PANELS WITH A FACTOR STRUCTURE

Published online by Cambridge University Press:  06 September 2007

Jörg Breitung  and
Samarjit Das
Jörg Breitung
Affiliation:
University of Bonn
Samarjit Das
Affiliation:
Indian Statistical Institute
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper considers various tests of the unit root hypothesis in panels where the cross-section dependence is due to common dynamic factors. Three situations are studied. First, the common factors and idiosyncratic components may both be nonstationary. In this case test statistics based on generalized least squares (GLS) possess a standard normal limiting distribution, whereas test statistics based on ordinary least squares (OLS) are invalid. Second, if the common component is I(1) and the idiosyncratic component is stationary (the case of cross-unit cointegration), then both the OLS and the GLS statistics fail. Finally, if the idiosyncratic components are I(1) but the common factors are stationary, then the OLS-based test statistics are severely biased, whereas the GLS-based test statistics are asymptotically valid in this situation. A Monte Carlo study is conducted to verify the asymptotic results.The research for this paper was carried out within research project “Unit roots and cointegration in panel data” financed by the German Research Association (DFG). We thank Paulo Rodrigues and two anonymous referees for helpful comments and suggestions.

Type
Research Article
Information
Econometric Theory , Volume 24 , Issue 1 , February 2008 , pp. 88 - 108
Copyright
© 2008 Cambridge University Press

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

Bai, J. & S. Ng (2002) Determining the number of factors in approximate factor models. Econometrica 70, 191–221.Google Scholar
Bai, J. & S. Ng (2004) A PANIC attack on unit roots and cointegration. Econometrica 72, 1127–1177.Google Scholar
Banerjee, A., M. Marcellino, & C. Osbat (2005) Testing for PPP: Should we use panel methods? Empirical Economics 30, 77–91.Google Scholar
Breitung, J. (2000) The local power of some unit root tests for panel data. In B. Baltagi (ed.), Nonstationary Panels, Panel Cointegration, and Dynamic Panels, Advances in Econometrics, vol. 15, pp. 161–178. JAI.
Breitung, J. & S. Das (2005) Panel unit root tests under cross sectional dependence. Statistica Neerlandica 59, 1–20.Google Scholar
Breitung, J. & M.H. Pesaran (2007) Unit roots and cointegration in panels. In L. Mátyás & P. Sevestre (eds.), The Econometrics of Panel Data: Fundamentals and Recent Developments in Theory and Practice. Springer.
Chang, Y. (2002) Nonlinear IV unit root tests in panels with cross-sectional dependency. Journal of Econometrics 110, 261–292.Google Scholar
Chang, Y. (2004) Bootstrap unit root tests in panels with cross-sectional dependency. Journal of Econometrics 120, 263–293.Google Scholar
Choi, I. (2002) Combination Unit Root Tests for Cross-Sectionally Correlated Panels. Mimeo, Hong Kong University of Science and Technology.
Evans, G.B.A. & N.E. Savin (1981) Testing for unit roots, part 1. Econometrica 49, 753–779.Google Scholar
Gengenbach, C., F.C. Palm, & J.-P. Urbain (2005) Panel Unit Root Tests in the Presence of Cross-Sectional Dependencies: Comparison and Implications for Modelling. METEOR Research Memorandum 04039, Maastricht University.
Harris, R.D.F. & E. Tzavalis (1999) Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics 91, 201–226.Google Scholar
Harvey, A.C. (1989) Forecasting, Structural Time Series Models and the Kalman Filter. Cambridge University Press.
Harvey, A. & D. Bates (2003) Multivariate Unit Root Tests, Stability and Convergence. DAE Working paper 301, University of Cambridge.
Im, K.S., M.H. Pesaran, & Y. Shin (2003) Testing for unit roots in heterogenous panels. Journal of Econometrics 115, 53–74.Google Scholar
Jönsson, K. (2005) Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test. Oxford Bulletin of Economics and Statistics 63, 369–392.Google Scholar
Levin, A., C. Lin, & C.J. Chu (2002) Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics 108, 1–24.Google Scholar
Moon, R. & B. Perron (2004) Testing for unit root in panels with dynamic factors. Journal of Econometrics 122, 81–126.Google Scholar
Pesaran, H.M. (2005) A Simple Panel Unit Root Test in the Presence of Cross Section Dependence. Cambridge Working Papers in Economics 0346, revised version, University of Cambridge.
Phillips, P.C.B. & H.R. Moon (1999) Linear regression limit theory for nonstationary panel data. Econometrica 67, 1057–1111.Google Scholar
Phillips, P.C.B. & D. Sul (2003) Dynamic panel estimation and homogeneity testing under cross section dependence. Econometrics Journal 6, 217–259.Google Scholar
Said, S.E. & D.A. Dickey (1984) Testing for unit roots in autoregressive-moving average models of unknown order. Biometrika 71, 599–607.Google Scholar
Stock, J.H. & M.W. Watson (2002) Forecasting using principal components from a large number of predictors. Journal of the American Statistical Association 97, 1167–1179.Google Scholar
Zellner, A. (1962) An efficient method of estimating seemingly unrelated regressions and tests of aggregation bids. Journal of the American Statistical Association 57, 348–368.Google Scholar