Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test

Kristian Jönsson

No 2003:10, Working Papers from Lund University, Department of Economics

Abstract: In this paper, we investigate the effects of cross-sectional disturbance correlation in a homogenous panel-data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross-sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small-sample homogenous panel-data unit root tests. The reduction in size distortion comes at small cost of lower power against a stationary alternative.

Keywords: Panel Data; Unit Root; Private Consumption (search for similar items in EconPapers)
JEL-codes: C23 E21 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2003-07-11
New Economics Papers: this item is included in nep-ecm and nep-ets
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Published in Oxford Bulletin of Economics and Statistics, 2005, pages 369-392.

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Journal Article: Cross‐sectional Dependency and Size Distortion in a Small‐sample Homogeneous Panel Data Unit Root Test (2005)
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