Testing for a Unit Root in Panels with Dynamic Factors

Hyungsik Moon () and Benoit Perron ()

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: This paper studies testing for a unit root for large n and T panels in which the cross-sectional units are correlated. To model this cross-sectional correlation, we assume that the data is generated by an unknown number of unobservable common factors. We propose unit root tests in this environment and derive their (Gaussian) asymptotic distribution under the null hypothesis of a unit root and local alternatives. We show that these tests have significant asymptotic power when the model has no incidental trends. However, when there are incidental trends in the model and it is necessary to remove heterogeneous deterministic components, we show that these tests have no power against the same local alternatives. Through Monte Carlo simulations, we provide evidence on the finite sample properties of these new tests.

Keywords: unit roots; nel data; factor models (search for similar items in EconPapers)
Pages: 57 ges pages
Date: 2002
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
http://hdl.handle.net/1866/489 (application/pdf)

Related works:
Journal Article: Testing for a unit root in panels with dynamic factors (2004)
Working Paper: TESTING FOR A UNIT ROOT IN PANELS WITH DYNAMIC FACTORS (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2002-18

Access Statistics for this paper

More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC.
Bibliographic data for series maintained by Sharon BREWER ().