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Panel cointegration with global stochastic trends

  • Bai, Jushan
  • Kao, Chihwa
  • Ng, Serena

This paper studies estimation of panel cointegration models with cross-sectional dependence generated by unobserved global stochastic trends. The standard least squares estimator is, in general, inconsistent owing to the spuriousness induced by the unobservable I(1) trends. We propose two iterative procedures that jointly estimate the slope parameters and the stochastic trends. The resulting estimators are referred to respectively as CupBC (continuously-updated and bias-corrected) and the CupFM (continuously-updated and fully-modified) estimators. We establish their consistency and derive their limiting distributions. Both are asymptotically unbiased and (mixed) normal and permit inference to be conducted using standard test statistics. The estimators are also valid when there are mixed stationary and non-stationary factors, as well as when the factors are all stationary.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-4076(08)00206-6
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 149 (2009)
Issue (Month): 1 (April)
Pages: 82-99

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Handle: RePEc:eee:econom:v:149:y:2009:i:1:p:82-99
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  4. Jushan Bai & Serena Ng, 2001. "A Panic Attack on Unit Roots and Cointegration," Economics Working Paper Archive 469, The Johns Hopkins University,Department of Economics.
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  22. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  23. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  24. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
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