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An empirical analysis of nonstationarity in a panel of interest rates with factors

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  • Benoit Perron

    (Département de sciences économiques, CIREQ and CIRANO, Université de Montréal, Montreal, Quebec, Canada)

  • Hyungsik Roger Moon

    (Department of Economics, University of Southern California, Los Angeles, CA, USA)

Abstract

This paper studies nonstationarities in a panel of Canadian and US interest rates of different maturities and risk. We focus on methods which model the cross-sectional dependence within the panel as a linear dynamic factor model, and decompose our data into common and idiosyncratic components that we analyze in turn. Our results suggest the presence of a single nonstationary factor in our panel. Since some of the idiosyncratic components are stationary, we conclude that these series are cointegrated. Finally, the dominant factors can be interpreted as level and slope factors as in the term structure literature. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.931
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File URL: http://qed.econ.queensu.ca:80/jae/2007-v22.2/
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 22 (2007)
Issue (Month): 2 ()
Pages: 383-400

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Handle: RePEc:jae:japmet:v:22:y:2007:i:2:p:383-400

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References

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  1. Luciano Gutierrez, 2006. "Panel Unit-root Tests for Cross-sectionally Correlated Panels: A Monte Carlo Comparison," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 519-540, 08.
  2. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
  3. 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.
  4. 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.
  5. Samarjit Das & Joerg Breitung, 2004. "Panel Unit Root Tests under Cross- sectional Dependence," Econometric Society 2004 North American Summer Meetings 55, Econometric Society.
  6. Campbell, John Y & Shiller, Robert J, 1987. "Cointegration and Tests of Present Value Models," Journal of Political Economy, University of Chicago Press, vol. 95(5), pages 1062-88, October.
  7. Hyungsik Roger Moon & Benoit Perron & Peter C.B. Phillips, 2003. "Incidental Trends and the Power of Panel Unit Root Tests," Cowles Foundation Discussion Papers 1435, Cowles Foundation for Research in Economics, Yale University.
  8. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
  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. 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.
  11. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07.
  12. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  13. repec:mtl:montec:18-2002 is not listed on IDEAS
  14. Taylor, Mark P. & Sarno, Lucio, 1998. "The behavior of real exchange rates during the post-Bretton Woods period," Journal of International Economics, Elsevier, vol. 46(2), pages 281-312, December.
  15. Chang, Yoosoon, 2002. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," Working Papers 2000-08, Rice University, Department of Economics.
  16. Bai, Jushan, 2004. "Estimating cross-section common stochastic trends in nonstationary panel data," Journal of Econometrics, Elsevier, vol. 122(1), pages 137-183, September.
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Citations

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Cited by:
  1. MOON, H.R. & 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 10-2010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Holly, S. & Petrella, I., 2010. "Factor Demand Linkages, Technology Shocks and the Business Cycle," Cambridge Working Papers in Economics 1001, Faculty of Economics, University of Cambridge.
  3. Geweke, John F. & Horowitz, Joel L. & Pesaran, M. Hashem, 2006. "Econometrics: A Bird's Eye View," IZA Discussion Papers 2458, Institute for the Study of Labor (IZA).
  4. 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).
  5. Kula, Ferit & Aslan, Alper, 2008. "Hysteresis vs. natural rate of unemployment: One, the other, or both?," MPRA Paper 14054, University Library of Munich, Germany.
  6. Claude Lopez, 2003. "An Improved Panel Unit Root Test Using GLS-Detrending," University of Cincinnati, Economics Working Papers Series 2003-06, University of Cincinnati, Department of Economics.

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