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Some Cautions on the Use of the LLC Panel Unit Root Test

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  • Westerlund, Joakim

    (METEOR)

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    Abstract

    One of the single most cited studies within the field of nonstationary panel data analysis is that of LLC (Levin, Lin and Chu, 2002. Unit Root\linebreak Tests in Panel Data: Asymptotic and Finite Sample Properties. \emph{Journal of Econometrics} 98, 1-24), in which the authors propose a test for a common unit root in the panel. Using both theoretical arguments and simulation evidence, we show that this test generally suffers from serious bias when combined with most commonly used rules for lag length and bandwidth selection. To remedy this bias effect, we propose a slightly modified test that performs well in small samples and that is computationally more convenient than the LLC test.

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    Bibliographic Info

    Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 055.

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    Date of creation: 2006
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    Handle: RePEc:unm:umamet:2006055

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    Keywords: econometrics;

    References

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    1. Peter C.B. Phillips & Joon Y. Park, 1986. "Statistical Inference in Regressions with Integrated Processes: Part 1," Cowles Foundation Discussion Papers 811R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1987.
    2. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
    3. Jaroslava Hlouskova & Martin Wagner, 2005. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Diskussionsschriften dp0503, Universitaet Bern, Departement Volkswirtschaft.
    4. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    5. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
    6. Syed A. Basher & Mohammed Mohsin, 2003. ""PPP tests in cointegrated panels: Evidence from Asian developing countries"," Macroeconomics 0310012, EconWPA.
    7. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
    8. Jesús Crespo-Cuaresma & Jarko Fidrmuc & Ronald McDonald, 2004. "The monetary approach to exchange rates in the CEECs," Macroeconomics 0401013, EconWPA.
    9. Jönsson, Kristian, 2003. "Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test," Working Papers 2003:10, Lund University, Department of Economics.
    10. Karlsson, Sune & Löthgren, Mickael, 1999. "On the power and interpretation of panel unit root tests," Working Paper Series in Economics and Finance 299, Stockholm School of Economics.
    11. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    12. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    13. Kim, Hongkee & Oh, Keun-Yeob & Jeong, Chan-Woo, 2005. "Panel cointegration results on international capital mobility in Asian economies," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 71-82, February.
    14. Jenkins, Michael A. & Snaith, Sean M., 2005. "Tests of Purchasing Power Parity via cointegration analysis of heterogeneous panels with consumer price indices," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 345-362, June.
    15. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
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