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A residual-based test of the null of cointegration in panel data

  • Suzanne McCoskey
  • Chihwa Kao

This paper proposes a residual-based Lagrange Multiplier (LM) test for the null of cointegration in panel data. The test is analogous to the locally best unbiased invariant (LBUI) for a moving average (MA) unit root. The asymptotic distribution of the test is derived under the null. Monte Carlo simulations are performed to study the size and power properties of the proposed test. overall, the empirical sizes of the LM-FM and LM-DOLs are close to the true size even in small samples. The power is quite good for the panels where T ≥ 50, and decent with panels for fewer observation in T. In our fixed sample of N = 50 and T = 50, the presence of a moving average and correlation between the LM-DOLS test seems to be better at correcting these effects, although in some cases the LM-FM test is more powerful. Although much of the non-stationary time series econometrics has been criticized for having more to do with the specific properties of the data set rather than underlying economic models, the recent development of the cointegration literature has allowed for a concrete bridge between economic long run theory and time series methods. Our test now allows for the testing of the null of cointegration in a panel setting and should be of considerable interest to economists in a wide variety of fields.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/07474939808800403
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Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 17 (1998)
Issue (Month): 1 ()
Pages: 57-84

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Handle: RePEc:taf:emetrv:v:17:y:1998:i:1:p:57-84
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  1. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation for Research in Economics, Yale University.
  2. Chihwa Kao & Min-Hsien Chiang, 1999. "On the Estimation and Inference of a Cointegrated Regression in Panel Data," Center for Policy Research Working Papers 2, Center for Policy Research, Maxwell School, Syracuse University.
  3. repec:cup:etheor:v:6:y:1990:i:4:p:433-44 is not listed on IDEAS
  4. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
  5. Phillips, Peter C B & Loretan, Mico, 1991. "Estimating Long-run Economic Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 407-36, May.
  6. Shin, Yongcheol, 1994. "A Residual-Based Test of the Null of Cointegration Against the Alternative of No Cointegration," Econometric Theory, Cambridge University Press, vol. 10(01), pages 91-115, March.
  7. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 99-125, January.
  8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  9. Tanaka, Katsuto, 1990. "Testing for a Moving Average Unit Root," Econometric Theory, Cambridge University Press, vol. 6(04), pages 433-444, December.
  10. Danny Quah, 1993. "Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data," FMG Discussion Papers dp171, Financial Markets Group.
  11. Quintos, Carmela E & Phillips, Peter C B, 1993. "Parameter Constancy in Cointegrating Regressions," Empirical Economics, Springer, vol. 18(4), pages 675-706.
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