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Cross-sectional Dependency and Size Distortion in a Small-sample Homogeneous Panel Data Unit Root Test

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  • Kristian Jönsson

Abstract

In this paper, we investigate the effects of cross-sectional disturbance correlation in a homogeneous panel data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross-sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small-sample homogeneous panel data unit root tests. The reduction in size distortion comes at a small cost of lower power against a stationary alternative. Copyright 2005 Blackwell Publishing Ltd.

Suggested Citation

  • Kristian Jönsson, 2005. "Cross-sectional Dependency and Size Distortion in a Small-sample Homogeneous Panel Data Unit Root Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 369-392, June.
  • Handle: RePEc:bla:obuest:v:67:y:2005:i:3:p:369-392
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    Cited by:

    1. Canarella, Giorgio & Miller, Stephen M. & Nourayi, Mahmoud M., 2013. "Firm profitability: Mean-reverting or random-walk behavior?," Journal of Economics and Business, Elsevier, pages 76-97.
    2. Demetrescu, Matei & Hanck, Christoph, 2012. "A simple nonstationary-volatility robust panel unit root test," Economics Letters, Elsevier, pages 10-13.
    3. Matteo Lanzafame, 2006. "The Nature of Regional Unemployment in Italy," ERSA conference papers ersa06p155, European Regional Science Association.
    4. Matteo Lanzafame, "undated". "The Nature of Regional Unemployment in Italy," Regional and Urban Modeling 283600051, EcoMod.
    5. Marcelo C. Medeiros & Eduardo Mendes & Les Oxley, 2014. "A Note on Nonlinear Cointegration, Misspecification, and Bimodality," Econometric Reviews, Taylor & Francis Journals, vol. 33(7), pages 713-731, October.
    6. Gimenez-Nadal, J. Ignacio & Molina, José Alberto & Sevilla, Almudena, 2007. "Household Division of Labor, Partnerships and Children: Evidence from Europe," IZA Discussion Papers 2884, Institute for the Study of Labor (IZA).
    7. Aguirre, Mariana & Ibikunle, Gbenga, 2014. "Determinants of renewable energy growth: A global sample analysis," Energy Policy, Elsevier, pages 374-384.
    8. Kholodilin Konstantin A. & Menz Jan-Oliver & Siliverstovs Boriss, 2010. "What Drives Housing Prices Down? Evidence from an International Panel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, pages 59-76.
    9. Fischer, Christoph, 2007. "An assessment of the trends in international price competitiveness among EMU countries," Discussion Paper Series 1: Economic Studies 2007,08, Deutsche Bundesbank, Research Centre.
    10. Jönsson, Kristian, 2004. "Testing for Stationarity in Panel Data Models when Disturbances are Cross-Sectionally Correlated," Working Papers 2004:17, Lund University, Department of Economics, revised 26 Nov 2004.
    11. Kholodilin Konstantin A. & Menz Jan-Oliver & Siliverstovs Boriss, 2010. "What Drives Housing Prices Down? Evidence from an International Panel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, pages 59-76.
    12. Helmut Herwartz & Florian Siedenburg, 2013. "To converge or not converge: unit labor cost inflation in the Euro area," Empirical Economics, Springer, pages 455-467.
    13. Carlsson, Mikael & Lyhagen, Johan & Österholm, Pär, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," Working Paper Series 2008:1, Uppsala University, Department of Economics.
    14. Christoph Fischer & Daniel Porath, 2010. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Empirical Economics, Springer, pages 767-792.
    15. Westerlund Joakim, 2006. "Some Cautions on the Use of the LLC Panel Unit Root Test," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    16. Matteo Lanzafame, 2010. "The nature of regional unemployment in Italy," Empirical Economics, Springer, pages 877-895.
    17. Fischer, Christoph, 2012. "Price convergence in the EMU? Evidence from micro data," European Economic Review, Elsevier, pages 757-776.
    18. Christoph Fischer & Daniel Porath, 2010. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Empirical Economics, Springer, pages 767-792.
    19. Konstantins Benkovskis & Julia Wörz, 2016. "Non-price competitiveness of exports from emerging countries," Empirical Economics, Springer, vol. 51(2), pages 707-735, September.
    20. Koffie Ben Nassar & Edder Martinez & Anabel Pineda, 2014. "Determinants of Banks' Net Interest Margins in Honduras," IMF Working Papers 14/163, International Monetary Fund.
    21. Carlsson, Mikael & Lyhagen, Johan & Österholm, Pär, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," Working Paper Series 2008:1, Uppsala University, Department of Economics.
    22. Behar Alberto & Hodge James, 2008. "The Employment Effects of Mergers in a Declining Industry: The Case of South African Gold Mining," The B.E. Journal of Economic Analysis & Policy, De Gruyter, pages 1-20.
    23. repec:sgm:jbfeuw:v:1:y:2017:i:7:p:5-27 is not listed on IDEAS
    24. Xiujian Chen & Shu Lin & W. Robert Reed, 2005. "Another Look At What To Do With Time-Series Cross-Section Data," Econometrics 0506004, EconWPA.
    25. Matteo Lanzafame, 2010. "The nature of regional unemployment in Italy," Empirical Economics, Springer, pages 877-895.

    More about this item

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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