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A fixed-T version of Breitung's panel data unit root test and its asymptotic local power

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  • Yiannis Karavias
  • Elias Tzavalis

Abstract

We extend Breitung's (2000) large-T panel data unit root test to the case of fixed time dimension while still allowing for heteroscedastic and serially correlated error terms. The analytic local power function of the new test is derived assuming that only the cross section dimension of the panel grows large. It is found that if the errors are serially uncorrelated the test also has trivial power, but, if not, this is no longer the case. Monte Carlo experiments show that the suggested test is more powerful than its large-T, original version when the number of cross section units is moderate or large, regardless of the number of time series observations.

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  • Yiannis Karavias & Elias Tzavalis, 2014. "A fixed-T version of Breitung's panel data unit root test and its asymptotic local power," Discussion Papers 14/02, University of Nottingham, Granger Centre for Time Series Econometrics.
    • Handle: RePEc:not:notgts:14/02
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    References listed on IDEAS

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    1. Rembert De Blander & Geert Dhaene, 2012. "Unit root tests for panel data with AR(1) errors and small T," Econometrics Journal, Royal Economic Society, vol. 15(1), pages 101-124, February.
    2. 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.
    3. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
    4. 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.
    5. Edith Madsen, 2010. "Unit root inference in panel data models where the time-series dimension is fixed: a comparison of different tests," Econometrics Journal, Royal Economic Society, vol. 13(1), pages 63-94, February.
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    Keywords

    Panel unit root; local power function; serial correlation; incidental trends;
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