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Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence

Antonia Arsova () and Deniz Dilan Karaman Oersal ()
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Antonia Arsova: Leuphana University Lueneburg, Germany
Deniz Dilan Karaman Oersal: Leuphana University Lueneburg, Germany

Authors registered in the RePEc Author Service: Deniz Dilan Karaman Örsal ()

No 280, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: This paper proposes a new likelihood-based panel cointegration rank test which extends the test of Oersal and Droge (2012) (henceforth Panel SL test) to allow for crosssectional dependence. The dependence is modelled by unobserved common factors which affect the variables in each cross-section through heterogeneous loadings. The common components are estimated following the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) approach of Bai and Ng (2004) and the estimates are subtracted from the observations. The cointegrating rank of the defactored data is then tested by the Panel SL test. A Monte Carlo study demonstrates that the proposed testing procedure has reasonable size and power properties in finite samples.

Keywords: panel cointegration rank test; cross-sectional dependence; common factors; likelihoodratio; time trend (search for similar items in EconPapers)
JEL-codes: C12 C15 C33 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2013-08
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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Journal Article: Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence (2018) Downloads
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