A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model under misspecification

X. Zhou and Martin Solberger
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X. Zhou: Externe publicaties SBE

No 58, Research Memorandum from Maastricht University, Graduate School of Business and Economics (GSBE)

Abstract: We consider an exact factor model and derive a Lagrange multiplier-type test for unit roots in the idiosyncratic components. The asymptotic distribution of the statistic is derived under the misspecification that the differenced factors are white noise. We prove that the asymptotic distribution is independent of the distribution of the factors, and that the factors are allowed to be integrated, cointegrate, or be stationary. In a simulation study, size and power is compared with some popular second generation panel unit root tests. The simulations suggest that our statistic is well-behaved in terms of size and that it is powerful and robust in comparison with existing tests.

Date: 2013-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:unm:umagsb:2013058

DOI: 10.26481/umagsb.2013058

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