Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency

Yoosoon Chang ()

No 1251, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: We apply bootstrap methodology to unit root tests for dependent panels with N cross-sectional units and T time series observations. More specifically, we let each panel be driven by a general linear process which may be different across cross-sectional units, and approximate it by a finite order autoregressive integrated process of order increasing with T. As we allow the dependency among the innovations generating the individual panels, we construct our unit root tests from the estimation of the system of the entire N panels. The limit distributions of the tests are derived by passing T to infinity, with N fixed. We then apply the bootstrap method to the approximated autoregressions to obtain the critical values for the panel unit root tests, and establish the asymptotic validity of such bootstrap panel unit root tests under general conditions. The proposed bootstrap tests are indeed quite general covering a wide class of panel models. They in particular allow for very general dynamic structures which may vary across individual units, and more importantly for the presence of arbitrary cross-sectional dependency. The finite sample performance of the bootstrap tests is examined via simulations, and compared to that of the t-bar statistics by Im, Pesaran and Shin (1997), which is one of the commonly used unit root tests for panel data. We find that our bootstrap panel unit root tests perform well relative to the t-bar statistics, especially when N is small.

Keywords: Panels with cross-sectional dependency; unit root tests; sieve bootstrap; AR approximation (search for similar items in EconPapers)
JEL-codes: C12 C15 C32 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2000-03
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Related works:
Working Paper: Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency (2000)
Journal Article: Bootstrap unit root tests in panels with cross-sectional dependency (2004)
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