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The effects of variance breaks on homogenous panel unit root tests

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  • Herwartz, Helmut
  • Siedenburg, Florian
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    Abstract

    Noting that many economic variables display occasional shifts in their second order moments, we investigate the performance of homogenous panel unit root tests in the presence of permanent volatility shifts. It is shown that in this case, panel unit root tests derived under time invariant innovation variances lose control over actual significance levels while the test proposed by Herwartz and Siedenburg (2008) retains size control. A simulation study of the finite sample properties confirms the theoretical results in finite samples. As an empirical illustration, we reassess evidence on the Fisher hypothesis. --

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    Bibliographic Info

    Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2009,07.

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    Date of creation: 2009
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    Handle: RePEc:zbw:cauewp:200907

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    Keywords: Panel unit root tests; variance breaks; cross sectional dependence; Fisher hypothesis;

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