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Unit root inference in panel data models where the time-series dimension is fixed: A comparison of different tests

Author

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  • Edith Madsen

    (Institute of Economics, University of Copenhagen)

Abstract

The objective of the paper is to investigate and compare the performance of some of the unit root tests in micro-panels which have been suggested in the literature. The framework is an autoregressive panel data model allowing for heterogeneity in the intercept but not in the autoregressive parameter. The tests being considered can be used to distinguish between the null hypothesis of each time-series process being a random walk and the alternative hypothesis of each time-series process being stationary with individual-specific levels but the same autoregressive parameter. In addition, the tests are all based on usual t-statistics corresponding to least squares estimators of the autoregressive parameter resulting from different transformations of the model. The performance of the tests is investigated by deriving the local power of the tests when the autoregressive parameter is local-to-unity. The results show that the assumption concerning the initial values is important in this matter. The outcome of a simulation experiment demonstrates that the local power of the tests provides a good approximation to their actual power in finite samples.

Suggested Citation

  • Edith Madsen, 2003. "Unit root inference in panel data models where the time-series dimension is fixed: A comparison of different tests," CAM Working Papers 2003-13, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    • Handle: RePEc:kud:kuieca:2003_13
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    File URL: http://www.econ.ku.dk/cam/wp0910/wp0203/2003-13.pdf/
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    Citations

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    Cited by:

    1. Westerlund, Joakim & Breitung, Jörg, 2009. "Myths and Facts about Panel Unit Root Tests," Working Papers in Economics 380, University of Gothenburg, Department of Economics.
    2. Caterina Giannetti, 2015. "Unit roots and the dynamics of market shares: an analysis using an Italian banking micro-panel," Empirical Economics, Springer, vol. 48(2), pages 537-555, March.
    3. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank.

    More about this item

    Keywords

    dynamic panel data model; unit roots; local alternatives; initial values;
    All these keywords.

    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

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