The Refinement of a Common Correlated Effect Estimator in Panel Unit Root Testing: An Extensive Simulation Study

Tolga Omay, Yılmaz Akdi, Furkan Emirmahmutoglu and Meltem Eryılmaz
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Yılmaz Akdi: Department of Statistics, Ankara University, 06100 Ankara, Türkiye
Furkan Emirmahmutoglu: Department of Econometrics, Ankara Hacı Bayram Veli University, 06500 Ankara, Türkiye
Meltem Eryılmaz: Department of Software Engineering, Ostim Technical University, 06374 Ankara, Türkiye

Mathematics, 2024, vol. 12, issue 22, 1-25

Abstract: The Common Correlated Effect (CCE) estimator is widely used in panel data models to address cross-sectional dependence, particularly in nonstationary panels. However, existing estimators have limitations, especially in small-sample settings. This study refines the CCE estimator by introducing new proxy variables and testing them through a comprehensive set of simulations. The proposed method is simple yet effective, aiming to improve the handling of cross-sectional dependence. Simulation results show that the refined estimator eliminates cross-sectional dependence more effectively than the original CCE, with improved power properties under both weak- and strong-dependence scenarios. The refined estimator performs particularly well in small sample sizes. These findings offer a more robust framework for panel unit root testing, enhancing the reliability of CCE estimators and contributing to further developments in addressing cross-sectional dependence in panel data models.

Keywords: panel unit root test; cross-sectional dependency; common correlated effect estimator; CD test (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2024
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