An LM-type test for idiosyncratic unit roots in the exact factor model with integrated factors

Xingwu Zhou and Martin Solberger

Communications in Statistics - Theory and Methods, 2017, vol. 46, issue 10, 4888-4914

Abstract: We consider an exact factor model with integrated factors and propose an LM-type test for unit roots in the idiosyncratic component. We show that, for a fixed number of panel individuals (N) and when the number of time points (T) tends to infinity, the limiting distribution of the LM-type statistic is a weighted sum of independent Chi-square variables with one degree of freedom, and when T tends to infinity followed by N tending to infinity, the limiting distribution is standard normal. The results should contribute to the challenging task of deriving likelihood-based unit-root tests in dynamic factor models.

Date: 2017
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DOI: 10.1080/03610926.2015.1091079

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