Nonstationary-volatility robust panel unit root tests and the great moderation

Christoph Hanck () and Robert Czudaj

AStA Advances in Statistical Analysis, 2015, vol. 99, issue 2, 187 pages

Abstract: This paper argues that typical applications of panel unit root tests should take possible nonstationarity in the volatility process of the innovations of the panel time series into account. Nonstationary volatility arises, for instance, when there are structural breaks in the innovation variances. A prominent example is the reduction in GDP growth variances enjoyed by many industrialized countries, known as the ‘Great moderation.’ It also proposes a new testing approach for panel unit roots that is, unlike many existing tests, robust to such volatility processes. The panel test is based on Simes’ (Biometrika 73:751–754, 1986 ) classical multiple test, which combines evidence from time series unit root tests of the series in the panel. As time series tests, we employ the recent proposals of Cavaliere and Taylor (J Time Ser Anal 29:300–330, 2008b ). The panel test is robust to general patterns of cross-sectional dependence and yet is straightforward to implement, only requiring valid $$p$$ p values of time series tests, and no resampling. Simulations show other panel unit root tests to suffer from sometimes severe size distortions under nonstationary volatility and that this can be remedied using the test proposed here. We use the methods to test for unit roots in OECD panels of gross domestic products and inflation rates, yielding inference robust to the ‘Great moderation’. We find little evidence of trend stationarity and mixed evidence regarding inflation stationarity. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Panel unit root test; Nonstationary volatility; Cross-sectional dependence; GDP stationarity; Inflation stationarity; C12; C23; E31; O40 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10182-014-0235-3 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Nonstationary-Volatility Robust Panel Unit Root Tests and the Great Moderation (2013)
Working Paper: Nonstationary-Volatility Robust Panel Unit Root Tests and the Great Moderation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:alstar:v:99:y:2015:i:2:p:161-187

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/10182/PS2

DOI: 10.1007/s10182-014-0235-3

Access Statistics for this article

AStA Advances in Statistical Analysis is currently edited by Göran Kauermann and Yarema Okhrin

More articles in AStA Advances in Statistical Analysis from Springer, German Statistical Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().