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Panel unit root tests in the presence of cross-sectional dependence: finite sample performance and an application

S. de Silva, Kaddour Hadri () and Andrew Tremayne

Econometrics Journal, 2009, vol. 12, issue 2, 340-366

Abstract: This paper examines the finite sample properties of three testing regimes for the null hypothesis of a panel unit root against stationary alternatives in the presence of cross-sectional correlation. The regimes of Bai and Ng (2004), Moon and Perron (2004) and Pesaran (2007) are assessed in the presence of multiple factors and also other non-standard situations. The behaviour of some information criteria used to determine the number of factors in a panel is examined and new information criteria with improved properties in small-N panels proposed. An application to the efficient markets hypothesis is also provided. The null hypothesis of a panel random walk is not rejected by any of the tests, supporting the efficient markets hypothesis in the financial services sector of the Australian Stock Exchange. Copyright © 2009 The Author(s). Journal compilation © Royal Economic Society 2009

Date: 2009
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Econometrics Journal is currently edited by Richard J. Smith, Oliver Linton, Pierre Perron, Jaap Abbring and Marius Ooms

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