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Panel cointegration with global stochastic trends

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Listed author(s):
  • Bai, Jushan
  • Kao, Chihwa
  • Ng, Serena

Abstract

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

Keywords: Panel data Common shocks Co-movements Cross-sectional dependence Factor analysis Fully-modified estimator;

Other versions of this item:

Find related papers by JEL classification:
  • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
  • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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