A PANIC Attack on Unit Roots and Cointegration

Jushan Bai () and Serena Ng ()

No 519, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper develops a new methodology that makes use of the factor structure of large dimensional panels to understand the nature of non-stationarity in the data. We refer to it as PANICÜ a 'Panel Analysis of Non-stationarity in Idiosyncratic and Common components'. PANIC consists of univariate and panel tests with a number of novel features. It can detect whether the nonstationarity is pervasive, or variable-specific, or both. It tests the components of the data instead of the observed series. Inference is therefore more accurate when the components have different orders of integration. PANIC also permits the construction of valid panel tests even when cross-section correlation invalidates pooling of statistics constructed using the observed data. The key to PANIC is consistent estimation of the components even when the regressions are individually spurious. We provide a rigorous theory for estimation and inference. In Monte Carlo simulations, the tests have very good size and power. PANIC is applied to a panel of inflation series.

Keywords: Panel data; common factors; common trends; principal components (search for similar items in EconPapers)
JEL-codes: C22 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: Written
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Related works:
Working Paper: A Panic Attack on Unit Roots and Cointegration (2001)
Journal Article: A PANIC Attack on Unit Roots and Cointegration (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:519

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