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On the Importance of the First Observation in GLS Detrending in Unit Root Testing

  • Joakim Westerlund


    (Deakin University)

First-differencing is generally taken to imply the loss of one observation, the first, or at least that the effect of ignoring this observation is asymptotically negligible. However, this is not always true, as in the case of GLS detrending. In order to illustrate this, the current paper considers as an example the use of GLS detrended data when testing for a unit root. The results show that the treatment of the first observation is absolutely crucial for test performance, and that ignorance causes test break-down.

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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2014_07.

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Handle: RePEc:dkn:ecomet:fe_2014_07
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  1. Claude Lopez, 2005. "A Panel Unit Root Test with Good Power in Small Samples," University of Cincinnati, Economics Working Papers Series 2005-01, University of Cincinnati, Department of Economics, revised 2007.
  2. Moon, Hyungsik Roger & Perron, Benoit & Phillips, Peter C.B., 2007. "Incidental trends and the power of panel unit root tests," Journal of Econometrics, Elsevier, vol. 141(2), pages 416-459, December.
  3. 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.
  4. David I. Harvey & Stephen J. Leybourne & A. M. Robert Taylor, 2007. "Unit root testing in practice: dealing with uncertainty over the trend and initial condition," Discussion Papers 07/03, University of Nottingham, Granger Centre for Time Series Econometrics.
  5. 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.
  6. Graham Elliott & Michael Jansson, . "Testing for Unit Roots with Stationary Covariates," Economics Working Papers 2000-6, School of Economics and Management, University of Aarhus.
  7. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
  8. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles, 2002. " Series-Specific Unit Root Tests with Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 527-46, December.
  9. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07.
  10. 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.
  11. Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, vol. 71(4), pages 1269-1286, 07.
  12. Hyungsik Roger Moon & Benoit Perron, 2008. "Asymptotic local power of pooled t-ratio tests for unit roots in panels with fixed effects," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 80-104, 03.
  13. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
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