A Simple Panel Unit Root Test in the Presence of Cross Section Dependence

Mohammad Pesaran

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: A number of panel unit root tests that allow for cross section dependence have been proposed in the literature, notably by Bai and Ng (2002), Moon and Perron (2003) and Phillips and Sul (2002) who use orthogonalization type procedures to asymptotically eliminate the cross dependence of the series. In this paper we propose a simple alternative test where the standard DF (or ADF) regressions are augmented with the cross section averages of lagged levels and first-differences of the individual series. A truncated version of the CADF statistics is also considered. New asymptotic results are obtained both for the individual CADF statistics and their simple averages. It is shown that the CADFi statistics are asymptotically similar and do not depend on the factor loadings under joint asymptotics where N (cross section dimension) and T (time series dimension) ? 8, such that N/T? k, where k is a fixed finite non-zero constant. But they are asymptotically correlated due to their dependence on the common factor. Despite this of the proposed tests are investigated by Monte Carlo experiments for a variety of models. It is shown that the cross sectionally augmented panel unit root tests have satisfactory size and power even for relatively small values of N and T. This is particularly true of cross sectionally augmented and truncated versions of the simple average t-test of Im, Pesaran and Shin, and Choi’s inverse normal combination test.

Keywords: panel unit root tests; cross-section dependence; heterogeneous dynamic panels; finite sample properties (search for similar items in EconPapers)
JEL-codes: C12 C15 C22 C23 (search for similar items in EconPapers)
Pages: 72
Date: 2003-10
New Economics Papers: this item is included in nep-ecm and nep-ets
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (225)

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Related works:
Journal Article: A simple panel unit root test in the presence of cross-section dependence (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0346

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