Panel Cointegration Testing in the Presence of a Time Trend
Bernd Droge and
Deniz Dilan Karaman Ã–rsal
Authors registered in the RePEc Author Service: Deniz Dilan Karaman Örsal ()
SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649
The purpose of this paper is to propose a new likelihood-based panel cointegration test in the presence of a linear time trend in the data generating process. This new test is an extension of the likelihood ratio (LR) test of Saikkonen & LÃ¼tkepohl (2000) for trend-adjusted data to the panel data framework, and is called the panel SL test. The idea is first to take the average of the individual LR (trace) statistics over the cross-sections and then to standardize the test statistic with the appropriate asymptotic moments. Under the null hypothesis, this standardized statistic has a limiting normal distribution as the number of time periods (T) and the number of cross-sections (N) tend to infinity sequentially. In addition to the approximation based on asymptotic moments, a second approximation approach involving the moments from a vector autoregressive process of order one is also introduced. By means of a Monte Carlo study the finite sample size and size-adjusted power properties of the test are investigated. The test presents reasonable size with the increase in T and N, and has high power in small samples.
Keywords: Panel Cointegration Test; Likelihood Ratio; Time Trend; Monte Carlo Study (search for similar items in EconPapers)
JEL-codes: C12 C15 C33 (search for similar items in EconPapers)
Pages: 32 pages
New Economics Papers: this item is included in nep-ecm and nep-ets
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Journal Article: Panel cointegration testing in the presence of a time trend (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:hum:wpaper:sfb649dp2009-005
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