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The local power of some unit root tests for panel data

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  • Breitung, Jörg

Abstract

To test the hypothesis of a difference stationary time series against a trend stationary alternative, Levin and Lin (1993) and Im, Pesaran and Shin (1997) suggest bias adjusted t-statistics. Such corrections are necessary to account for the nonzero mean of the t-statistic in the case of an OLS detrending method. In this paper the local power of panel unit root statistics against a sequence of local alternatives is studied. It is shown that the local power of the test statistics is affected by two different terms. The first term represents the asymptotic effect on the bias due the detrending method and the second term is the usual location parameter of the limiting distribution under the sequence of local alternatives. It is argued that both terms can offset each other so that the test has no power against the sequence of local alternatives. This results suggest to construct test statistics based on alternative detrending methods. We consider a class of t-statistics that do not require a bias correction. The results of a Monte Carlo experiment suggest that avoiding the bias can improve the power of the test substantially. --

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Bibliographic Info

Paper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 1999,69.

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Date of creation: 1999
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Handle: RePEc:zbw:sfb373:199969

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Cited by:
  1. Hyungsik Roger Moon & Benoit Perron & Peter C.B. Phillips, 2005. "Incidental Trends and the Power of Panel Unit Root Tests," IEPR Working Papers 05.38, Institute of Economic Policy Research (IEPR).
  2. Andros Gregoriou, 2010. "Corporate Valuation and Dividends: UK Evidence from Panel Unit Root and Cointegration Tests," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(1), pages 15-22, March.
  3. Razzak, Weshah & Stillman, Steve & Johnson, Robin, 2005. "Has New Zealand benefited from its investments in research & development?," MPRA Paper 1887, University Library of Munich, Germany.
  4. Lee, Bun Song & Chun, Sun Eae & Kim, Suk Young, 2007. "The effects of regional characteristics on population growth in Korean cities, counties and wards," Journal of Asian Economics, Elsevier, vol. 18(3), pages 490-508, June.
  5. Habibullah, M.S. & Law, Siong-Hook & Dayang-Afizzah, A.M., 2008. "Defense spending and economic growth in Asian economies: A panel error-correction approach," MPRA Paper 12105, University Library of Munich, Germany.
  6. Andros Gregoriou & Alexandros Kontonikas, . "The Long Run Relationship Between Stock Prices And Goods Prices: New Evidence From Panel Cointegration," Working Papers 2008_19, Business School - Economics, University of Glasgow.
  7. Christopoulos, Dimitris K. & Tsionas, Efthymios G., 2004. "Financial development and economic growth: evidence from panel unit root and cointegration tests," Journal of Development Economics, Elsevier, vol. 73(1), pages 55-74, February.
  8. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.

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