The Power Performance of Fixed-T Panel Unit Root Tests allowing for Structural Breaks

Yiannis Karavias and Elias Tzavalis

MPRA Paper from University Library of Munich, Germany

Abstract: The asymptotic local power of least squares based fixed-T panel unit root tests allowing for a structural break in their individual effects and/or incidental trends of the AR(1) panel data model is studied. These tests correct the least squares estimator of the autoregressive coefficient of this panel data model for its inconsistency due to the individual effects and/or incidental trends of the panel. The limiting distributions of the tests are analytically derived under a sequence of local alternatives, assuming that the cross-sectional dimension of the tests (N) grows large. It is shown that the considered fixed-T tests have local power which tends to unity fast only if the panel data model includes individual effects. For panel data models with incidental trends, the power of the tests becomes trivial. However, this problem does not always appear if the tests allow for serial correlation of the error term.

Keywords: Panel data; unit root tests; structural breaks; local power; serial correlation; incidental trends (search for similar items in EconPapers)
JEL-codes: C22 C23 (search for similar items in EconPapers)
Date: 2013-04-09
New Economics Papers: this item is included in nep-ecm and nep-ets
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Related works:
Working Paper: The power performance of fixed-T panel unit root tests allowing for structural breaks (2013)
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