Cross‐sectional Dependency and Size Distortion in a Small‐sample Homogeneous Panel Data Unit Root Test

Kristian Jönsson

Oxford Bulletin of Economics and Statistics, 2005, vol. 67, issue 3, 369-392

Abstract: In this paper, we investigate the effects of cross‐sectional disturbance correlation in a homogeneous panel data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross‐sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small‐sample homogeneous panel data unit root tests. The reduction in size distortion comes at a small cost of lower power against a stationary alternative.

Date: 2005
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https://doi.org/10.1111/j.1468-0084.2005.00124.x

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Working Paper: Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test (2003)
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