Incidental Trends and the Power of Panel Unit Root Tests

Hyungsik Roger Moon (), Benoit Perron () and Peter C. B. Phillips ()

No 1435, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: The asymptotic local powers of various panel unit root tests are investigated. The power envelope is obtained under homogeneous and heterogeneous alternatives. It is compared with asymptotic power functions of the pooled t-test, the Ploberger-Phillips (2002) test, and a point optimal test in neighborhoods of unity that are of order n^{1/4}T{-1} and n^{1/2}T^{-1}, depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported.

Keywords: Asymptotic power envelope; Common point optimal test; Heterogeneous alternatives; Incidental trends; Local to unity; Power function; Panel unit root test (search for similar items in EconPapers)
JEL-codes: C22 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2003-09
Note: CFP 1215.
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Published in Journal of Econometrics (December 2007), 141(2): 416-459

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http://cowles.econ.yale.edu/P/cd/d14a/d1435.pdf (application/pdf)

Related works:
Working Paper: Incidental Trends and the Power of Panel Unit Root Tests (2004)
Working Paper: Incidental Trends and the Power of Panel Unit Root Tests (2005)
Journal Article: Incidental trends and the power of panel unit root tests (2007)
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