A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model under misspecification
AbstractWe consider an exact factor model and derive a Lagrange multiplier-type test for unit roots in the idiosyncratic components. The asymptotic distribution of the statistic is derived under the misspecification that the differenced factors are white noise. We prove that the asymptotic distribution is independent of the distribution of the factors, and that the factors are allowed to be integrated, cointegrate, or be stationary. In a simulation study, size and power is compared with some popular second generation panel unit root tests. The simulations suggest that our statistic is well-behaved in terms of size and that it is powerful and robust in comparison with existing tests.
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Bibliographic InfoPaper provided by Maastricht : GSBE, Graduate School of Business and Economics in its series Research Memorandum with number 058.
Date of creation: 2013
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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm
Hypothesis Testing: General; Single Equation Models; Single Variables: Models with Panel Data; Longitudinal Data; Spatial Time Series;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-25 (All new papers)
- NEP-ECM-2013-10-25 (Econometrics)
- NEP-ETS-2013-10-25 (Econometric Time Series)
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