Panel vector autoregression under cross-sectional dependence
Econometrics Journal, 2008, vol. 11, issue 2, pages 219-243
This paper studies estimation in panel vector autoregression (VAR) under cross-sectional dependence. The time series are allowed to be an unknown mixture of stationary and unit root processes with possible cointegrating relations. The cross-sectional dependence is modeled with a factor structure. We extend the factor analysis in Bai and Ng (2002, Econometrica 70, 91--221) to vector processes. The fully modified (FM) estimator in Phillips (1995) is used for estimation in panel VAR and we also propose a factor augmented FM estimator. Our simulation results show this factor augmented FM estimator performs well when sample size is large. Copyright © 2008 The Author. Journal compilation © Royal Economic Society 2008
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Persistent link: http://EconPapers.repec.org/RePEc:ect:emjrnl:v:11:y:2008:i:2:p:219-243
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