The power performance of fixed-T panel unit root tests allowing for structural breaks in their deterministic components

Yiannis Karavias and Elias Tzavalis
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Yiannis Karavias: School of Economics, University of Nottingham Granger Centre for Time Series Econometrics

No 201323, Working Papers from Athens University Of Economics and Business, Department of Economics

Abstract: The asymptotic local power of least squares based Oxed-Tpanel unit root testsallowing for a structural break in their individual e§ects and/or incidental trends ofthe AR(1) panel data model is studied. These tests correct the least squares estimatorof the autoregressive coe? cient of this panel data model for its inconsistency due to the individual effects and/or incidental trends of the panel. The limiting distributionsof the tests are analytically derived under a sequence of local alternatives, assumingthat the cross-sectional dimension of the tests (N) grows large. It is shown that theconsidered Oxed-Ttests have local power which tends to unity fast only if the panel data model includes individual effects. For panel data models with incidental trends,the power of the tests be- comes trivial. However, this problem does not always appearif the tests allow for serial correlation of the error term.

Keywords: Panel data; unit root tests; structural breaks; local power; serial corre-lation; incidental trends (search for similar items in EconPapers)
JEL-codes: C22 C23 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2013
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