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

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Author Info
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.

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Publisher Info
Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2003-13.

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Length: 41 pages
Date of creation: Aug 2003
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Handle: RePEc:kud:kuieca:2003_13

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Related research
Keywords: dynamic panel data model; unit roots; local alternatives; initial values;

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Find related papers by JEL classification:
C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Hypothesis Testing
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single 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. Breitung, Jorg & Meyer, Wolfgang, 1994. "Testing for Unit Roots in Panel Data: Are Wages on Different Bargaining Levels Cointegrated?," Applied Economics, Taylor and Francis Journals, vol. 26(4), pages 353-61, April.
  2. Stephen Bond & Céline Nauges & Frank Windmeijer, 2002. "Unit Roots and Identification in Autoregressive Panel Data Models: A Comparison of Alternative Tests," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C5-4, International Conferences on Panel Data. [Downloadable!]
  3. 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)
  4. Harris, R. & Tzavalis, E., 1996. "Inference for Unit Roots in Dynamic Panels," Discussion Papers 96/04, University of Exeter, School of Business and Economics.
  5. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
  6. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  7. Hugo Kruiniger & Elias Tzavalis, 2002. "Testing for Unit Roots in Short Dynamic Panels with Serially Correlated and Heteroscedastic Disturbance Terms," Working Papers 459, Queen Mary, University of London, Department of Economics. [Downloadable!]
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  8. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August. [Downloadable!] (restricted)
  9. 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!]
  10. 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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  11. Baltagi, Badi H. & Boozer, Michael A., 1997. "Econometric Analysis of Panel Data," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October. [Downloadable!]
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(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. Edith Madsen, 2003. "Using GMM when testing for a unit root in panels where the time-series dimension is fixed," CAM Working Papers 2003-11, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
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