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Cross-sectional dependence robust block bootstrap panel unit root tests

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Author Info

  • Palm, Franz C.
  • Smeekes, Stephan
  • Urbain, Jean-Pierre

Abstract

In this paper we consider the issue of unit root testing in cross-sectionally dependent panels. We consider panels that may be characterized by various forms of cross-sectional dependence including (but not exclusive to) the popular common factor framework. We consider block bootstrap versions of the group-mean (Im et al., 2003) and the pooled (Levin et al., 2002) unit root coefficient DF tests for panel data, originally proposed for a setting of no cross-sectional dependence beyond a common time effect. The tests, suited for testing for unit roots in the observed data, can be easily implemented as no specification or estimation of the dependence structure is required. Asymptotic properties of the tests are derived for T going to infinity and N finite. Asymptotic validity of the bootstrap tests is established in very general settings, including the presence of common factors and cointegration across units. Properties under the alternative hypothesis are also considered. In a Monte Carlo simulation, the bootstrap tests are found to have rejection frequencies that are much closer to nominal size than the rejection frequencies for the corresponding asymptotic tests. The power properties of the bootstrap tests appear to be similar to those of the asymptotic tests.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 163 (2011)
Issue (Month): 1 (July)
Pages: 85-104

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Handle: RePEc:eee:econom:v:163:y:2011:i:1:p:85-104

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Block bootstrap Panel unit root test Cross-sectional dependence;

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References

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  1. Yoosoon Chang & Wonho Song, 2009. "Testing for Unit Roots in Small Panels with Short-run and Long-run Cross-sectional Dependencies," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 903-935.
  2. Jushan Bai & Serena Ng, 2001. "A Panic Attack on Unit Roots and Cointegration," Economics Working Paper Archive 469, The Johns Hopkins University,Department of Economics.
  3. Hyungsik Roger Moon & Benoit Perron & Peter C.B. Phillips, 2005. "Incidental Trends and the Power of Panel Unit Root Tests," IEPR Working Papers 05.38, Institute of Economic Policy Research (IEPR).
  4. Phillips, P C B & Durlauf, S N, 1986. "Multiple Time Series Regression with Integrated Processes," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 473-95, August.
  5. Christian Gengenbach & Franz Palm & Jean-Pierre Urbain, 2010. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependencies: Comparison and Implications for Modelling," Econometric Reviews, Taylor & Francis Journals, vol. 29(2), pages 111-145.
  6. Dimitris Politis & Halbert White, 2004. "Automatic Block-Length Selection for the Dependent Bootstrap," Econometric Reviews, Taylor & Francis Journals, vol. 23(1), pages 53-70.
  7. Stephan Smeekes, 2013. "Detrending Bootstrap Unit Root Tests," Econometric Reviews, Taylor & Francis Journals, vol. 32(8), pages 869-891, November.
  8. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
  9. Jaroslava Hlouskova & Martin Wagner, 2006. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 85-116.
  10. Timothy K. Chue & In Choi, 2007. "Subsampling hypothesis tests for nonstationary panels with applications to exchange rates and stock prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 233-264.
  11. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," CESifo Working Paper Series 2689, CESifo Group Munich.
  12. G. Kapetanios, 2008. "A bootstrap procedure for panel data sets with many cross-sectional units," Econometrics Journal, Royal Economic Society, vol. 11(2), pages 377-395, 07.
  13. Stefano Fachin, 2007. "Long-run trends in internal migrations in italy: a study in panel cointegration with dependent units," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 401-428.
  14. Horowitz, Joel L. & Savin, N. E., 2000. "Empirically relevant critical values for hypothesis tests: A bootstrap approach," Journal of Econometrics, Elsevier, vol. 95(2), pages 375-389, April.
  15. Chang, Yoosoon, 2004. "Bootstrap unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 120(2), pages 263-293, June.
  16. Efstathios Paparoditis & Dimitris N. Politis, 2003. "Residual-Based Block Bootstrap for Unit Root Testing," Econometrica, Econometric Society, vol. 71(3), pages 813-855, 05.
  17. 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.
  18. Jörg Breitung & Samarjit Das, 2005. "Panel unit root tests under cross-sectional dependence," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(4), pages 414-433.
  19. Bai, Jushan & Ng, Serena, 2010. "Panel Unit Root Tests With Cross-Section Dependence: A Further Investigation," Econometric Theory, Cambridge University Press, vol. 26(04), pages 1088-1114, August.
  20. 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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Citations

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Cited by:
  1. MOON, Hyungsik Roger & PERRON, Benoit, 2010. "Beyond Panel Unit Root Tests: Using Multiple Testing to Determine the Non Stationarity Properties of Individual Series in a Panel," Cahiers de recherche 2010-04, Universite de Montreal, Departement de sciences economiques.
  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. Omer, Muhammad & de Haan, Jakob & Scholtens, Bert, 2013. "Does Uncovered Interest rate Parity Hold After All?," MPRA Paper 47572, University Library of Munich, Germany.
  4. Eijffinger, S.C.W. & Qian, Z., 2010. "Globalization and the Output-Inflation Tradeoff: New Time Series Evidence," Discussion Paper 2010-27, Tilburg University, Center for Economic Research.
  5. Pesaran, M. Hashem & Vanessa Smith, L. & Yamagata, Takashi, 2013. "Panel unit root tests in the presence of a multifactor error structure," Journal of Econometrics, Elsevier, vol. 175(2), pages 94-115.
  6. Hanck, Christoph & Demetrescu, Matei & Tarcolea, Adina, 2012. "IV-Based Cointegration Testing in Dependent Panels with Time-Varying Variance," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62072, Verein für Socialpolitik / German Economic Association.
  7. Smeekes Stephan, 2011. "Bootstrap Sequential Tests to Determine the Stationary Units in a Panel," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Bodart, V. & Candelon, B. & Carpantier, J.-F., 2012. "Real exchanges rates in commodity producing countries: A reappraisal," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1482-1502.
  9. Matsuki, Takashi & Sugimoto, Kimiko, 2013. "Stationarity of Asian real exchange rates: An empirical application of multiple testing to nonstationary panels with a structural break," Economic Modelling, Elsevier, vol. 34(C), pages 52-58.
  10. Di Iorio, Francesca & Triacca, Umberto, 2013. "Testing for Granger non-causality using the autoregressive metric," Economic Modelling, Elsevier, vol. 33(C), pages 120-125.
  11. Yushu Li & Ghazi Shukur, 2013. "Testing for Unit Roots in Panel Data Using a Wavelet Ratio Method," Computational Economics, Society for Computational Economics, vol. 41(1), pages 59-69, January.
  12. Smeekes Stephan & Urbain Jean-Pierre, 2011. "On the Applicability of the Sieve Bootstrap in Time series Panels," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  13. Di Iorio, Francesca & Fachin, Stefano, 2010. "A Panel Cointegration study of the long-run relationship between Savings and Investments in the OECD economies, 1970-2007," MPRA Paper 25873, University Library of Munich, Germany.
  14. Muhammad Omer & Jakob de Haan & Bert Scholtens, 2012. "Testing Uncovered Interest Rate Parity Using LIBOR," CESifo Working Paper Series 3839, CESifo Group Munich.
  15. Francesca Di Iorio & Stefano Fachin, 2012. "Savings and Investments in the OECD: a panel cointegration study with a new bootstrap test," DSS Empirical Economics and Econometrics Working Papers Series 2012/2, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
  16. Iorio, Francesca Di & Fachin, Stefano, 2014. "Savings and investments in the OECD, 1970–2007: A test of panel cointegration with regime changes," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 59-76.

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