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Panel Unit Root Tests in the Presence of Cross-Sectional Dependency and Heterogeneity

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Author Info
Yoosoon Chang () (Department of Economics, Rice University)
Wonho Song (Department of Economics, Rice University)

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Abstract

An IV approach, using as instruments nonlinear transformations of the lagged levels, is explored to test for unit roots in panels with general dependency and heterogeneity across cross-sectional units. We allow not only for the cross-sectional dependencies of innovations, but also for the presence of cointegration across cross sectional levels. Unbalanced panels and panels with differing individual short run dynamics and cross-sectionally related dynamics are also permitted. Panels with such cross-sectional dependencies and heterogeneities appear to be quite commonly observed in practical applications. Yet none of the currently available tests can be used to test for unit roots in such general panels. We also more carefully formulate the unit root hypothesis in panels. In particular, using order statistics we make it possible to test for and against the presence of unit roots in some of the individual units for a given panel. The individual IV t-ratios, which are the bases of our tests, are asymptotically normally distributed and cross-sectionally independent. Therefore, the critical values of the order statistics as well as the usual averaged statistic can be easily obtained from simple elementary probability computations. We show via a set of simulations that our tests work well, while other existing tests fail to perform properly. As an illustration, our tests are applied to some of the data sets that were used in earlier studies.

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Paper provided by International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number B5-2.

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Date of creation: Mar 2002
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Handle: RePEc:cpd:pd2002:b5-2

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Related research
Keywords: Panels with cross-sectional dependency and heterogeneity; unit root test; cointegration; covariate; nonlinear instrument; order statistics;

Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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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. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation, Yale University. [Downloadable!]
  2. Yoosoon Chang & Joon Y. Park & Peter C.B. Phillips, 1999. "Nonlinear Econometric Models with Cointegrated and Deterministically Trending Regressors," Cowles Foundation Discussion Papers 1245, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  3. Park, Joon Y & Phillips, Peter C B, 2001. "Nonlinear Regressions with Integrated Time Series," Econometrica, Econometric Society, vol. 69(1), pages 117-61, January.
    Other versions:
  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. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October. [Downloadable!]
    Other versions:
  6. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June. [Downloadable!] (restricted)
  7. Yoosoon Chang, 2000. "Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency," Cowles Foundation Discussion Papers 1251, Cowles Foundation, Yale University. [Downloadable!]
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  8. 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)
  9. Yoosoon Chang, 2000. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," CIRJE F-Series CIRJE-F-85, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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  10. Park, Joon Y. & Phillips, Peter C.B., 1999. "Asymptotics For Nonlinear Transformations Of Integrated Time Series," Econometric Theory, Cambridge University Press, vol. 15(03), pages 269-298, June. [Downloadable!]
    Other versions:
  11. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
  12. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January. [Downloadable!] (restricted)
  13. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February. [Downloadable!] (restricted)
    Other versions:
  14. 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!]
  15. Yoosoon Chang & Joon Y. Park, 1999. "Nonstationary Index Models," Working Paper Series no7, Institute of Economic Research, Seoul National University. [Downloadable!]
  16. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation, Yale University. [Downloadable!]
  17. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November. [Downloadable!] (restricted)
  18. 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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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. David Harris & Steve Leybourne & Brendan McCabe, 2003. "Panel Stationarity Tests with Cross-sectional Dependence," Econometrics 0311005, EconWPA. [Downloadable!]
  2. Chang, Yoosoon, 2003. "Nonlinear IV Panel Unit Root Tests," Working Papers 2003-06, Rice University, Department of Economics. [Downloadable!]
  3. Syed A. Basher & Josep Lluís Carrion-i-Silvestre, 2007. "Another Look at the Null of Stationary RealExchange Rates. Panel Data with Structural Breaks and Cross-section Dependence," IREA Working Papers 200710, University of Barcelona, Research Institute of Applied Economics, revised May 2007. [Downloadable!]
  4. Martin Wagner & Jaroslava Hlouskova, 2004. "What's Really the Story with this Balassa-Samuelson Effect in the CEECs?," Diskussionsschriften dp0416, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  5. Chang, Yoosoon, 2004. "Taking a New Contour: A Novel Approach to Panel Unit Root Tests," Working Papers 2004-05, Rice University, Department of Economics. [Downloadable!]
  6. Min Hwang & John Quigley & Jae-young Son, 2006. "The Dividend Pricing Model: New Evidence from the Korean Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 32(3), pages 205-228, May. [Downloadable!] (restricted)
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