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On the interpretation of panel unit root tests

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  • Pesaran, M. Hashem

Abstract

Applications of panel unit root tests have become commonplace in empirical economics, yet there are ambiguities as how best to interpret the test results. This note clarifies that rejection of the panel unit root hypothesis should be interpreted as evidence that a statistically significant proportion of the units are stationary. Accordingly, in the event of a rejection, and in applications where the time dimension of the panel is relatively large, it recommends the test outcome to be augmented with an estimate of the proportion of the cross-section units for which the individual unit root tests are rejected. The economic importance of the rejection can be measured by the magnitude of this proportion.

Suggested Citation

  • Pesaran, M. Hashem, 2012. "On the interpretation of panel unit root tests," Economics Letters, Elsevier, vol. 116(3), pages 545-546.
    • Handle: RePEc:eee:ecolet:v:116:y:2012:i:3:p:545-546
    DOI: 10.1016/j.econlet.2012.04.049
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    References listed on IDEAS

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    1. Hashem Pesaran, M., 2007. "A pair-wise approach to testing for output and growth convergence," Journal of Econometrics, Elsevier, vol. 138(1), pages 312-355, May.
    2. Moon, H.R. & Perron, B., 2012. "Beyond panel unit root tests: Using multiple testing to determine the nonstationarity properties of individual series in a panel," Journal of Econometrics, Elsevier, vol. 169(1), pages 29-33.
    3. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    4. Chortareas, Georgios & Kapetanios, George, 2009. "Getting PPP right: Identifying mean-reverting real exchange rates in panels," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 390-404, February.
    5. Ng, Serena, 2008. "A Simple Test for Nonstationarity in Mixed Panels," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 113-127, January.
    6. Chang, Yoosoon, 2004. "Bootstrap unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 120(2), pages 263-293, June.
    7. Chang, Yoosoon, 2002. "Nonlinear IV unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 110(2), pages 261-292, October.
    8. George Kapetanios, 2003. "Determining the Poolability of Individual Series in Panel Datasets," Working Papers 499, Queen Mary University of London, School of Economics and Finance.
    9. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    10. László Mátyás & Patrick Sevestre (ed.), 2008. "The Econometrics of Panel Data," Advanced Studies in Theoretical and Applied Econometrics, Springer, number 978-3-540-75892-1, July-Dece.
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    12. Patrick Sevestre & Laszlo Matyas, 2008. "The Econometrics of Panel Data," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00279977, HAL.
    13. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
    14. Christoph Hanck, 2009. "For which countries did PPP hold? A multiple testing approach," Empirical Economics, Springer, vol. 37(1), pages 93-103, September.
    15. 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.
    16. George Kapetanios, 2003. "Determining the Poolability of Individual Series in Panel Datasets," Working Papers 499, Queen Mary University of London, School of Economics and Finance.
    17. George Kapetanios, 2003. "Determining the Stationarity Properties of Individual Series in Panel Datasets," Working Papers 495, Queen Mary University of London, School of Economics and Finance.
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    More about this item

    Keywords

    Unit root tests; Panels; Statistical significance;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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