The effects of variance breaks on homogenous panel unit root tests

Helmut Herwartz and Florian Siedenburg

No 2009-07, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: Noting that many economic variables display occasional shifts in their second order moments, we investigate the performance of homogenous panel unit root tests in the presence of permanent volatility shifts. It is shown that in this case, panel unit root tests derived under time invariant innovation variances lose control over actual significance levels while the test proposed by Herwartz and Siedenburg (2008) retains size control. A simulation study of the finite sample properties confirms the theoretical results in finite samples. As an empirical illustration, we reassess evidence on the Fisher hypothesis.

Keywords: Panel unit root tests; variance breaks; cross sectional dependence; Fisher hypothesis (search for similar items in EconPapers)
JEL-codes: C12 C23 E40 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ecm and nep-ets
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