Panel Cointegration Rank Testing with Cross-Section Dependence

Josep Carrion-i-Silvestre and Surdeanu Laura ()
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Surdeanu Laura: University of Barcelona

Studies in Nonlinear Dynamics & Econometrics, 2011, vol. 15, issue 4, 43

Abstract: In this paper, we propose a test statistic to determine the cointegration rank of VAR processes in panel data allowing for cross-section dependence among the time series in the panel data. The cross-section dependence is accounted for through the specification of an approximate common factor model, which covers situations where there is cointegration among the cross-section dimension. Finite sample performance is investigated via a Monte Carlo experiment. We show that in some cases not accounting for common factors when they are present can lead to overestimating the cointegrating rank. We apply our proposed tests to two empirical applications and find strong evidence for panel cointegration once common factors are accounted for.

Date: 2011
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DOI: 10.2202/1558-3708.1825

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