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Stability Tests for Heterogeneous Panel Data

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Author Info
Felix Chan Tommaso Mancini-Griffoli Laurent L. Pauwels (School of Economics and Finance, Curtin University of Technology Paris-Jourdan Sciences Economiques (PSE), CEPREMAP Hong Kong Monetary Authority and Graduate Institute of International Studies, Geneva)

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Abstract

This paper proposes a new test for structural instability in heterogeneous panels. The test builds on the seminal work of Andrews (2003) originally developed for time series. It is robust to non-normal, heteroskedastic and serially correlated errors, and allows for the number of post break observations to be small. Importantly, the test considers the alternative of a break affecting only some - and not all - individuals of the panel. Under mild assumptions the test statistic is shown to be asymptotically normal, thanks to the additional cross sectional dimension of panel data. This greatly facilitates the calculation of critical values. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. The test is then applied to investigate the effect of the Euro on trade.

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File URL: http://hei.unige.ch/sections/ec/pdfs/Working_papers/HEIWP24-2006.pdf
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Publisher Info
Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number 24-2006.

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Length: 22
Date of creation: Oct 2006
Date of revision: Dec 2006
Handle: RePEc:gii:giihei:heiwp24-2006

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Related research
Keywords: Structural change end-of-sample instability tests heterogeneous panels Monte Carlo Euro effect on trade.

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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  1. David Barr & Francis Breedon & David Miles, 2003. "Life on the outside: economic conditions and prospects outside euroland," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 573-613, October. [Downloadable!] (restricted)
  2. Helge Berger & Volker Nitsch, 2005. "Zooming Out: The Trade Effect of the Euro in Historical Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  3. Han, Aaron K & Park, Daekeun, 1989. "Testing for Structural Change in Panel Data: Application to a Study of U.S. Foreign Trade in Manufacturing Goods," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 135-42, February. [Downloadable!] (restricted)
  4. Richard E. Baldwin, 2006. "The euro's trade effect," Working Paper Series 594, European Central Bank. [Downloadable!]
  5. Lúcio Vinhas de Souza, 2002. "Trade Effects of Monetary Integration in Large, Mature Economies: A Primer on the European Monetary Union," Kiel Working Papers 1137, Kiel Institute for the World Economy. [Downloadable!]
  6. Sergio Nardis, 2003. "Currency unions and trade: The special case of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 139(4), pages 625-649, December. [Downloadable!] (restricted)
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  7. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November. [Downloadable!] (restricted)
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  8. Maurice J.G. Bun & Franc J.G.M. Klaassen, 2002. "Has the Euro increased Trade?," Tinbergen Institute Discussion Papers 02-108/2, Tinbergen Institute. [Downloadable!]
  9. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07. [Downloadable!] (restricted)
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  10. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 315-356, October. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  12. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
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  14. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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  15. 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)
  16. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, vol. 120(1), pages 1-43, January.
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  17. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
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