Inference for Unit Roots in Dynamic Panels in the Presence of Deterministic Trends
AbstractThis paper proposes a similar unit root testing procedure for heterogeneous dynamic panel data, based on the score principle, assuming that the time dimension of the panel is fixed. It is shown that the limiting distribution of the test is standard normal. The similarity with regard to the initial conditions and the heterogeneity (fixed effects) of the panel is achieved by considering a parameterization of the autoregressive model which allows for a trend under both the null and the alternative hypotheses, without introducing any irrelevant variables under either. Simulation evidence suggests that the proposed tests have empirical size that is very close to the nominal 5% level and considereably more power than other panel unit root tests and the corresponding unit root tests for the single time series case. As an application of our test, we re-examine whether real dividends and stock prices follow drifting random walks. In contrast with many earlier studies, we find that both real dividends and real stock prices are stationary around a deterministic trend.
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Bibliographic InfoPaper provided by Exeter University, Department of Economics in its series Discussion Papers with number 9705.
Date of creation: 1997
Date of revision:
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Panel Data; Unit Roots; Fixed Effects; Central Limit Theorem; Score Vector; Market Efficiency Hypothesis;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
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