DMCA
Testing for a Unit Root in Panels with Dynamic Factors (2002)
| Venue: | Journal of Econometrics |
| Citations: | 181 - 6 self |
BibTeX
@ARTICLE{Moon02testingfor,
author = {Hyungsik Roger Moon and Benoit Perron and Université De Montréal},
title = {Testing for a Unit Root in Panels with Dynamic Factors},
journal = {Journal of Econometrics},
year = {2002},
pages = {81--126}
}
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Abstract
This paper studies testing for a unit root for large n and T panels in which the cross-sectional units are correlated. To model this cross-sectional correlation, we assume that the data is generated by an unknown number of unobservable common factors. We propose unit root tests in this environment and derive their (Gaussian) asymptotic distribution under the null hypothesis of a unit root and local alterna-tives. We show that these tests have significant asympotitic power when the model has no incidental trends. However, when there are incidental trends in the model and it is necessary to remove heterogeneous deterministic components, we show that these tests have no power against the same local alternatives. Through Monte Carlo simulations, we provide evidence on the finite sample properties of these new tests. 1
Keyphrases
unit root dynamic factor incidental trend local alterna-tives significant asympotitic power unknown number asymptotic distribution monte carlo simulation cross-sectional correlation unit root test finite sample property new test cross-sectional unit unobservable common factor heterogeneous deterministic component null hypothesis local alternative paper study
