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A PANIC Attack on Unit Roots and Cointegration

Author

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  • Jushan Bai

    (Boston College)

  • Serena Ng

    (Johns Hopkins University)

Abstract

This paper develops a new methodology that makes use of the factor structure of large dimensional panels to understand the nature of non-stationarity in the data. We refer to it as PANIC‹ a 'Panel Analysis of Non-stationarity in Idiosyncratic and Common components'. PANIC consists of univariate and panel tests with a number of novel features. It can detect whether the nonstationarity is pervasive, or variable-specific, or both. It tests the components of the data instead of the observed series. Inference is therefore more accurate when the components have different orders of integration. PANIC also permits the construction of valid panel tests even when cross-section correlation invalidates pooling of statistics constructed using the observed data. The key to PANIC is consistent estimation of the components even when the regressions are individually spurious. We provide a rigorous theory for estimation and inference. In Monte Carlo simulations, the tests have very good size and power. PANIC is applied to a panel of inflation series.

Suggested Citation

  • Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics 519, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:519
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    More about this item

    Keywords

    Panel data; common factors; common trends; principal components;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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