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Unit root inference in panel data models where the time-series dimension is fixed: a comparison of different tests

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  • Edith Madsen

Abstract

The objective of the paper is to investigate and compare the performance of some of the unit root tests in micropanels, which have been suggested in the literature. The framework is a first-order autoregressive panel data model allowing for heterogeneity in the intercept but not in the autoregressive parameter. The tests are all based on usual t-statistics corresponding to least squares estimators of the autoregressive parameter resulting from different transformations of the observed variables. The performance of the tests is investigated and compared by deriving the local power of the tests when the autoregressive parameter is local-to-unity. The results show that the assumption concerning the initial values is extremely important in this matter. The outcome of a simulation experiment demonstrates that the local power of the tests provides a good approximation to their actual power in finite samples. Copyright (C) The Author(s). Journal compilation (C) Royal Economic Society 2010.

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  • Edith Madsen, 2010. "Unit root inference in panel data models where the time-series dimension is fixed: a comparison of different tests," Econometrics Journal, Royal Economic Society, vol. 13(1), pages 63-94, February.
  • Handle: RePEc:ect:emjrnl:v:13:y:2010:i:1:p:63-94
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    Citations

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    Cited by:

    1. Karavias, Yiannis & Tzavalis, Elias, 2012. "On the Local Power of Fixed T Panel Unit Root Tests with Serially Correlated Errors," MPRA Paper 43131, University Library of Munich, Germany.
    2. Becheri, I.G. & Drost, F.C. & van den Akker, R., 2013. "Asymptotically UMP Panel Unit Root Tests," Discussion Paper 2013-017, Tilburg University, Center for Economic Research.
    3. Canarella, Giorgio & Miller, Stephen M. & Nourayi, Mahmoud M., 2013. "Firm profitability: Mean-reverting or random-walk behavior?," Journal of Economics and Business, Elsevier, vol. 66(C), pages 76-97.
    4. Yiannis Karavias & Elias Tzavalis, "undated". "The power performance of fixed-T panel unit root tests allowing for structural breaks," Discussion Papers 13/01, University of Nottingham, Granger Centre for Time Series Econometrics.
    5. Sven-Olov Daunfeldt & Daniel Halvarsson, 2015. "Are high-growth firms one-hit wonders? Evidence from Sweden," Small Business Economics, Springer, vol. 44(2), pages 361-383, February.
    6. Becheri, I.G., 2012. "Limiting experiments for panel-data and jump-diffusion models," Other publications TiSEM 7e53f6cf-fab1-4f86-9e5d-b, Tilburg University, School of Economics and Management.
    7. Karavias, Yiannis & Tzavalis, Elias, 2014. "Testing for unit roots in short panels allowing for a structural break," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 391-407.
    8. Karavias, Yiannis & Tzavalis, Elias, 2014. "A fixed-T version of Breitung’s panel data unit root test," Economics Letters, Elsevier, vol. 124(1), pages 83-87.
    9. Mahmoud M. Nourayi & Julie W. Suh, 2015. "An Empirical Analysis of the Competitiveness in the U.S. Airline Industry," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 83-99, August.
    10. Yiannis Karavias & Elias Tzavalis, 2016. "Local Power of Fixed-T Panel Unit Root Tests With Serially Correlated Errors and Incidental Trends," Journal of Time Series Analysis, Wiley Blackwell, vol. 37(2), pages 222-239, March.
    11. Joakim Westerlund & Jörg Breitung, 2013. "Lessons from a Decade of IPS and LLC," Econometric Reviews, Taylor & Francis Journals, vol. 32(5-6), pages 547-591, August.
    12. Elert, Niklas & Halvardsson, Daniel, 2012. "Economic Freedom and Institutional Convergence," Ratio Working Papers 200, The Ratio Institute.
    13. Caterina Giannetti, 2015. "Unit roots and the dynamics of market shares: an analysis using an Italian banking micro-panel," Empirical Economics, Springer, vol. 48(2), pages 537-555, March.
    14. Robertson, Donald & Sarafidis, Vasilis & Westerlund, Joakim, 2014. "GMM Unit Root Inference in Generally Trending and Cross-Correlated Dynamic Panels," MPRA Paper 53419, University Library of Munich, Germany.

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