Some Cautions on the Use of the LLC Panel Unit Root Test

Joakim Westerlund
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Joakim Westerlund: METEOR

No 55, Research Memoranda from Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization

Abstract: One of the single most cited studies within the field of nonstationary panel data analysis is that of LLC (Levin, Lin and Chu, 2002. Unit Root\linebreak Tests in Panel Data: Asymptotic and Finite Sample Properties. \emph{Journal of Econometrics} 98, 1-24), in which the authors propose a test for a common unit root in the panel. Using both theoretical arguments and simulation evidence, we show that this test generally suffers from serious bias when combined with most commonly used rules for lag length and bandwidth selection. To remedy this bias effect, we propose a slightly modified test that performs well in small samples and that is computationally more convenient than the LLC test.

Keywords: econometrics (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets
Date: 2006
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