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Generalized fixed-T panel unit root tests allowing for structural breaks

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  • Yiannis Karavias
  • Elias Tzavalis

Abstract

In this paper we suggest panel data unit root tests which allow for structural breaks in the individual effects or linear trends of panel data models. This is done under the assumption that the disturbance terms of the panel are heterogenous and serially correlated. The limiting distributions of the suggested test statistics are derived under the assumption that the time-dimension of the panel (T) is fixed while the cross-section (N) grows large. Thus, they are appropriate for short panels, where T is small. The tests consider the cases of a known and unknown date break. For the latter case, the paper gives the analytic form of the distribution of the test statistics. Monte Carlo evidence suggests that our tests have size which is very close to its nominal level and satisfactory power in small-T panels. This is true even for cases where the degree of serial correlation is large and negative, where single time series unit root tests are found to be critically oversized.

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Paper provided by University of Nottingham, Granger Centre for Time Series Econometrics in its series Discussion Papers with number 12/02.

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Handle: RePEc:not:notgts:12/02

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Keywords: Panel data models; unit roots; structural breaks;

References

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  1. Vogelsang, Timothy J & Perron, Pierre, 1998. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1073-1100, November.
  2. 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.
  3. Perron, Pierre & Vogelsang, Timothy J, 1992. "Nonstationarity and Level Shifts with an Application to Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 301-20, July.
  4. Moon, Hyungsik Roger & Perron, Benoit & Phillips, Peter C.B., 2007. "Incidental trends and the power of panel unit root tests," Journal of Econometrics, Elsevier, vol. 141(2), pages 416-459, December.
  5. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  6. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
  7. Jaroslava Hlouskova & Martin Wagner, 2006. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 85-116.
  8. Schwert, G William, 1989. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(2), pages 147-59, April.
  9. Jushan Bai & Josep Llu�s Carrion-I-Silvestre, 2009. "Structural Changes, Common Stochastic Trends, and Unit Roots in Panel Data," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 471-501.
  10. Arellano-Valle, Reinaldo B. & Genton, Marc G., 2008. "On the exact distribution of the maximum of absolutely continuous dependent random variables," Statistics & Probability Letters, Elsevier, vol. 78(1), pages 27-35, January.
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