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Structural Changes, Common Stochastic Trends, and Unit Roots in Panel Data

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Author Info
JUSHAN BAI
JOSEP LLUÍS CARRION-I-SILVESTRE

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Abstract

This paper studies the problem of unit root testing in the presence of multiple structural changes and common dynamic factors. Structural breaks represent infrequent regime shifts, while dynamic factors capture common shocks underlying the comovement of economic time series. We examine the modified Sargan-Bhargava (MSB) test in the panel data setting and propose ways to handle multiple structural changes and dynamic factors. Properties of the MSB test under these non-standard conditions are derived. For example, the test statistics are shown to be invariant, in the limit, to mean breaks. This invariance does not carry over to breaks in linear trends, where the test statistics will converge to functionals of weighted Brownian bridges. A simplified test statistic is then proposed, which is invariant to both mean and trend breaks. We further study pooled test statistic based on standardization and combination of "p"-values. Response surfaces for "p"-values of all test statistics are computed to facilitate the empirical implementation of the proposed methodology. The pooled tests are shown to have good finite sample performance. Copyright © 2009 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2008.00530.x
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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 76 (2009)
Issue (Month): 2 (04)
Pages: 471-501
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Handle: RePEc:bla:restud:v:76:y:2009:i:2:p:471-501

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07. [Downloadable!] (restricted)
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  2. Josep Lluis Carrion Silvestre & Tomas del Barrio Castro & Enrique Lopez Bazo, 2002. "Level shifts in a panel data based unit root test. An application to the rate of unemployment," Working Papers in Economics 79, Universitat de Barcelona. Espai de Recerca en Economia. [Downloadable!]
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  3. MacKinnon, James G, 1994. "Approximate Asymptotic Distribution Functions for Unit-Root and Cointegration Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 167-76, April.
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  4. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I. [Downloadable!] (restricted)
  5. Robin L. Lumsdaine & David H. Papell, 1997. "Multiple Trend Breaks And The Unit-Root Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 212-218, May. [Downloadable!] (restricted)
  6. Adda, Jerome & Gonzalo, Jesus, 1996. "P-Values for non-standard distributions with an application to the DF test," Economics Letters, Elsevier, vol. 50(2), pages 155-160, February. [Downloadable!] (restricted)
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  7. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November. [Downloadable!] (restricted)
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  8. Hansen, Bruce E, 1997. "Approximate Asymptotic P Values for Structural-Change Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 60-67, January.
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  9. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation, Yale University. [Downloadable!]
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  10. Alan Bartley, William & Lee, Junsoo & Strazicich, Mark C., 2001. "Testing the null of cointegration in the presence of a structural break," Economics Letters, Elsevier, vol. 73(3), pages 315-323, December. [Downloadable!] (restricted)
  11. Fabio Busetti & Andrew C Harvey, 1998. "Testing for the Presence of a Random Walk in Series with Structural Breaks - (Now published in Journal of Time Series Analysis, 22 (2001), pp.127-150.)," STICERD - Econometrics Paper Series /1998/365, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  12. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
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  13. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April. [Downloadable!] (restricted)
  14. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October. [Downloadable!] (restricted)
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  15. Franses, Philip Hans & Haldrup, Niels, 1994. "The Effects of Additive Outliers on Tests for Unit Roots and Cointegration," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 471-78, October.
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  16. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
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  17. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I. [Downloadable!] (restricted)
  18. Lee, Junsoo & Strazicich, Mark, 2001. "Testing the Null of Stationarity in the Presence of a Structural Break," Applied Economics Letters, Taylor and Francis Journals, vol. 8(6), pages 377-82, June. [Downloadable!] (restricted)
  19. Vogelsang, Timothy J, 1998. "Testing for a Shift in Mean without Having to Estimate Serial-Correlation Parameters," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(1), pages 73-80, January.
  20. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  21. Jushan Bai & Serena Ng, 2001. "A New Look at Panel Testing of Stationarity and the PPP Hypothesis," Boston College Working Papers in Economics 518, Boston College Department of Economics. [Downloadable!]
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  22. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
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  23. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pui Sun Tam & University of Macau, 2006. "Breaking trend panel unit root tests," Computing in Economics and Finance 2006 341, Society for Computational Economics. [Downloadable!]
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