Local Asymptotic Power Of The Im-Pesaran-Shin Panel Unit Root Test And The Impact Of Initial Observations
In this note we derive the local asymptotic power function of the standardized averaged Dickey–Fuller panel unit root statistic of Im, Pesaran, and Shin (2003, Journal of Econometrics , 115, 53–74), allowing for heterogeneous deterministic intercept terms. We consider the situation where the deviation of the initial observation from the underlying intercept term in each individual time series may not be asymptotically negligible. We find that power decreases monotonically as the magnitude of the initial conditions increases, in direct contrast to what is usually observed in the univariate case. Finite-sample simulations confirm the relevance of this result for practical applications, demonstrating that the power of the test can be very low for values of T and N typically encountered in practice.
Volume (Year): 26 (2010)
Issue (Month): 01 (February)
|Contact details of provider:|| Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK|
Web page: http://journals.cambridge.org/jid_ECT
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003.
"Testing for unit roots in heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 115(1), pages 53-74, July.
- Tom Doan, . "IPSHIN: RATS procedure to implement Im, Pesaran and Shin panel unit root test," Statistical Software Components RTS00098, Boston College Department of Economics.
- Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
- Evans, G B A & Savin, N E, 1981. "Testing for Unit Roots: 1," Econometrica, Econometric Society, vol. 49(3), pages 753-79, May.
- David I. Harvey & Stephen J. Leybourne, 2005. "On testing for unit roots and the initial observation," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 97-111, 03.
- Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, vol. 71(4), pages 1269-1286, 07.
When requesting a correction, please mention this item's handle: RePEc:cup:etheor:v:26:y:2010:i:01:p:311-324_09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters)
If references are entirely missing, you can add them using this form.