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A Locally Optimal Test for No Unit Root in Cross-sectionally Dependent Panel Data

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  • Hadri, Kaddour
  • Kurozumi, Eiji

Abstract

This paper develops a simple test for the null hypothesis of no unit root for panel data with cross-sectional dependence in the form of a common factor in the disturbance. We do not estimate the common factor but mop-up its effect by employing the same method as the one proposed in Pesaran (2007) in the unit root testing context. We show that our test is asymptotically locally optimal, although the optimality is not guaranteed under a wide range of the alternative.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/22026/1/HJeco0520201650.pdf
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Bibliographic Info

Article provided by Hitotsubashi University in its journal Hitotsubashi Journal of Economics.

Volume (Year): 52 (2011)
Issue (Month): 2 (December)
Pages: 165-184

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Handle: RePEc:hit:hitjec:v:52:y:2011:i:2:p:165-184

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Related research

Keywords: KPSS test; unit root; cross-sectional dependence; LM test; locally best test;

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  1. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
  2. Chang, Yoosoon, 2004. "Bootstrap unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 120(2), pages 263-293, June.
  3. Harris, David & Leybourne, Stephen & McCabe, Brendan, 2005. "Panel Stationarity Tests for Purchasing Power Parity With Cross-Sectional Dependence," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 395-409, October.
  4. 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.
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Cited by:
  1. 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.

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