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Panel Unit Root Test with Nonlinear Mean Reversion and Smooth Breaks

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  • Lau, Chi Keung Marco
  • Chau, Frankie
  • Deesomsak, Rataporn

Abstract

This paper extends the unit root test of Christopoulos and Leòn-Ledesma (2010) to accommodate not only structural breaks and non-linear mean reversion, but also the contemporaneous cross-sectional dependence commonly found in panel dataset. The proposed test presents good finite sample properties and its applications on four major ASEAN countries’ real exchange rates show that the unit root hypothesis could be rejected, supporting their long-run Purchasing Power Parity (PPP) against the Chinese Yuan.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53602.

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Date of creation: 23 Mar 2011
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Handle: RePEc:pra:mprapa:53602

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Keywords: ASEAN countries; PPP; Panel ESTAR; Nonlinear adjustment; Contemporaneous dependence;

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  1. Sarno, Lucio & Taylor, Mark P. & Chowdhury, Ibrahim, 2004. "Nonlinear dynamics in deviations from the law of one price: a broad-based empirical study," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(1), pages 1-25, February.
  2. Kanas, Angelos & Genius, Margarita, 2005. "Regime (non)stationarity in the US/UK real exchange rate," Economics Letters, Elsevier, Elsevier, vol. 87(3), pages 407-413, June.
  3. Junsoo Lee & Walter Enders, 2004. "Testing for a unit-root with a nonlinear Fourier function," Econometric Society 2004 Far Eastern Meetings, Econometric Society 457, Econometric Society.
  4. Cerrato, Mario & de Peretti, Christian & Larsson, Rolf & Sarantis, Nicholas, 2011. "A Nonlinear Panel Unit Root Test under Cross Section Dependence," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-30, Scottish Institute for Research in Economics (SIRE).
  5. Sollis, Robert, 2009. "A simple unit root test against asymmetric STAR nonlinearity with an application to real exchange rates in Nordic countries," Economic Modelling, Elsevier, Elsevier, vol. 26(1), pages 118-125, January.
  6. Mario Cerrato & Christian De Peretti & Nick Sarantis, 2007. "A nonlinear panel unit root test under cross section dependence," Documents de recherche, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne 07-12, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  7. Ralf Becker & Walter Enders & Junsoo Lee, 2006. "A Stationarity Test in the Presence of an Unknown Number of Smooth Breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(3), pages 381-409, 05.
  8. Christopoulos, Dimitris K. & León-Ledesma, Miguel A., 2010. "Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(6), pages 1076-1093, October.
  9. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles S, 2001. "Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 9(3), pages 482-93, August.
  10. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 10(3), pages 251-70, July.
  11. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, Elsevier, vol. 112(2), pages 359-379, February.
  12. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
  13. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers, Princeton, Department of Economics - Econometric Research Program 338, Princeton, Department of Economics - Econometric Research Program.
  14. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  15. Cheung, Yin-Wong & Lai, Kon S., 2000. "On the purchasing power parity puzzle," Journal of International Economics, Elsevier, Elsevier, vol. 52(2), pages 321-330, December.
  16. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-42, November.
  17. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(4), pages 862-79, August.
  18. Ucar, Nuri & Omay, Tolga, 2009. "Testing for unit root in nonlinear heterogeneous panels," Economics Letters, Elsevier, Elsevier, vol. 104(1), pages 5-8, July.
  19. Chi Keung Marco Lau, 2009. "A more powerful panel unit root test with an application to PPP," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(1), pages 75-80.
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