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Dynamic Factor Extraction of Cross-Sectional Dependence in Panel Unit Root Tests

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Author Info
George Kapetanios () (Queen Mary, University of London)
Abstract

Recently, considerable emphasis has been placed on the problems arising out of cross-sectional dependence in panel unit root tests. This paper adopts the factor based cross-sectional dependence paradigm of Bai and Ng (2004) but suggests alternative factor extraction methods. Some theoretical results for these methods are provided. Further, a detailed Monte Carlo study of these methods for multiple and persistent factors is undertaken. It is found that results are radically different to the serially uncorrelated single factor case. Tests perform much worse and in some cases it is preferable not to correct at all for cross-sectional dependence.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp509.pdf
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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number 509.

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Date of creation: Feb 2004
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Handle: RePEc:qmw:qmwecw:wp509

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Related research
Keywords: Panel unit root tests Factor models Subspace algorithms

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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This page was last updated on 2008-10-30.

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