IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Panel Unit Root Tests in the Presence of a Multifactor Error Structure

  • Pesaran, M.H.
  • Smit, L.V.
  • Yamagata, T.

This paper extends the cross sectionally augmented panel unit root test proposed by Pesaran (2007) to the case of a multifactor error structure. The basic idea is to exploit information regarding the unobserved factors that are shared by other time series in addition to the variable under consideration. Importantly, our test procedure only requires specification of the maximum number of factors, in contrast to other panel unit root tests based on principal components that require in addition the estimation of the number of factors as well as the factors themselves. Small sample properties of the proposed test are investigated by Monte Carlo experiments, which suggest that it controls well for size in almost all cases, especially in the presence of serial correlation in the error term, contrary to alternative test statistics. Empirical applications to Fisher's inflation parity and real equity prices across different markets illustrate how the proposed test works in practice.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0775.pdf
File Function: Working Paper Version
Download Restriction: no

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0775.

as
in new window

Length: 24
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:cam:camdae:0775
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  2. Chang, Yoosoon, 2002. "Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency," Working Papers 2000-01, Rice University, Department of Economics.
  3. Graham Elliott & Michael Jansson, . "Testing for Unit Roots with Stationary Covariates," Economics Working Papers 2000-6, School of Economics and Management, University of Aarhus.
  4. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2005. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," CESifo Working Paper Series 1425, CESifo Group Munich.
  5. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
  6. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October.
  7. Palm Franz C. & Smeekes Stephan & Urbain Jean-Pierre, 2008. "Cross-Sectional Dependence Robust Block Bootstrap Panel Unit Root Tests," Research Memorandum 048, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
  9. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  10. 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.
  11. Bailey, Natalia & Kapetanios, George & Pesaran, M. Hashem, 2012. "Exponent of Cross-sectional Dependence: Estimation and Inference," IZA Discussion Papers 6318, Institute for the Study of Labor (IZA).
  12. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," CESifo Working Paper Series 2689, CESifo Group Munich.
  13. Westerlund, Joakim, 2007. "A Note on the Pooling of Individual PANIC Unit Root Tests," Working Papers 2007:5, Lund University, Department of Economics.
  14. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January.
  15. Bai, Jushan & Ng, Serena, 2010. "Panel Unit Root Tests With Cross-Section Dependence: A Further Investigation," Econometric Theory, Cambridge University Press, vol. 26(04), pages 1088-1114, August.
  16. L. Vanessa Smith & Stephen Leybourne & Tae-Hwan Kim & Paul Newbold, 2004. "More powerful panel data unit root tests with an application to mean reversion in real exchange rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(2), pages 147-170.
  17. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  18. Cerrato, Mario & Sarantis, Nicholas, 2007. "A bootstrap panel unit root test under cross-sectional dependence, with an application to PPP," Computational Statistics & Data Analysis, Elsevier, vol. 51(8), pages 4028-4037, May.
  19. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  20. Chang, Yoosoon, 2002. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," Working Papers 2000-08, Rice University, Department of Economics.
  21. Breitung, J rg & Das, Samarjit, 2008. "Testing For Unit Roots In Panels With A Factor Structure," Econometric Theory, Cambridge University Press, vol. 24(01), pages 88-108, February.
  22. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  23. David Harris & David I. Harvey & Stephen J. Leybourne & Nikoloas D. Sakkas, 2008. "Local asymptotic power of the Im-Pesaran-Shin panel unit root test and the impact of initial observations," Discussion Papers 08/02, University of Nottingham, Granger Centre for Time Series Econometrics.
  24. Hyungsik Roger Moon & Benoit Perron & Peter C.B. Phillips, 2005. "Incidental Trends and the Power of Panel Unit Root Tests," IEPR Working Papers 05.38, Institute of Economic Policy Research (IEPR).
  25. Timothy K. Chue & In Choi, 2007. "Subsampling hypothesis tests for nonstationary panels with applications to exchange rates and stock prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 233-264.
  26. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  27. Westerlund, Joakim & Breitung, Jörg, 2009. "Myths and Facts about Panel Unit Root Tests," Working Papers in Economics 380, University of Gothenburg, Department of Economics.
  28. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
  29. Hadri, Kaddour & Kurozumi, Eiji, 2011. "A Locally Optimal Test for No Unit Root in Cross-sectionally Dependent Panel Data," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 52(2), pages 165-184, December.
  30. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  31. Leybourne, S J, 1995. "Testing for Unit Roots Using Forward and Reverse Dickey-Fuller Regressions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 57(4), pages 559-71, November.
  32. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I.
  33. Sandra Eickmeier, 2009. "Comovements and heterogeneity in the euro area analyzed in a non-stationary dynamic factor model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 933-959.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0775. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Howard Cobb)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.