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Modelling and Testing for Structural Changes in Panel Cointegration Models with Common and Idiosyncratic Stochastic Trends

  • Chihwa Kao

    ()

  • Lorenzo Trapani

    ()

  • Giovanni Urga

    ()

In this paper, we propose an estimation and testing framework for parameter instability in cointe- grated panel regressions with common and idiosyncratic trends. We develop tests for structural change for the slope parameters under the null hypothesis of no structural break against the alternative hypoth- esis of (at least) one common change point which is possibly unknown. The limiting distributions of the proposed test statistics are derived. Monte Carlo simulations examine size and power of the proposed tests.

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File URL: http://hdl.handle.net/10446/419
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Paper provided by Department of Economics and Technology Management, University of Bergamo in its series Working Papers with number 0708.

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Date of creation: 2007
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Handle: RePEc:brh:wpaper:0708
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Web page: http://www.unibg.it/struttura/en_struttura.asp?cerca=en_dige_intro

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  1. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
  4. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
  5. Stefan de Wachter & Elias Tzavalis, 2004. "Detection of Structural Breaks in Linear Dynamic Panel Data Models," Working Papers 505, Queen Mary University of London, School of Economics and Finance.
  6. Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
  7. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
  8. Lawrence Joseph & David Wolfson, 1993. "Maximum likelihood estimation in the multi-path change-point problem," Annals of the Institute of Statistical Mathematics, Springer, vol. 45(3), pages 511-530, September.
  9. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
  10. Banerjee, Anindya & Urga, Giovanni, 2005. "Modelling structural breaks, long memory and stock market volatility: an overview," Journal of Econometrics, Elsevier, vol. 129(1-2), pages 1-34.
  11. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
  12. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  13. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07.
  14. Chihwa Kao & Lorenzo Trapani & Giovanni Urga, 2006. "The Asymptotics for Panel Models with Common Shocks," Center for Policy Research Working Papers 77, Center for Policy Research, Maxwell School, Syracuse University.
  15. Bai, Jushan, 2004. "Estimating cross-section common stochastic trends in nonstationary panel data," Journal of Econometrics, Elsevier, vol. 122(1), pages 137-183, September.
  16. Han, Aaron K & Park, Daekeun, 1989. "Testing for Structural Change in Panel Data: Application to a Study of U.S. Foreign Trade in Manufacturing Goods," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 135-42, February.
  17. Christophe P�rignon & Christophe Villa, 2006. "Sources of Time Variation in the Covariance Matrix of Interest Rates," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1535-1550, May.
  18. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  19. Francesco Audrino, 2005. "The Stability of Factor Models of Interest Rates," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(3), pages 422-441.
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