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Cointegration versus Spurious Regression in Heterogeneous Panels

Author

Listed:
  • Giovanni Urga
  • Lorenzo Trapani

Abstract

We consider the issue of cross sectional aggregation in nonstationary, heterogeneous panels where each unit cointegrates. We first derive the asymptotic properties of the aggregate estimate, and a necessary and sufficient condition for cointegration to hold in the aggregate relationship. We also develop an estimation and testing framework to verify whether the condition is met. Secondly, we analyze the case when cointegration doesn't carry through the aggregation process, investigating whether a mild violation can still lead to an aggregate estimator that summarizes the micro relationships reasonably well. We derive the asymptotic measure of the degree of non cointegration of the aggregated estimate and we provide estimation and testing procedures. A Monte Carlo exercise evaluates the small sample properties of the estimator.

Suggested Citation

  • Giovanni Urga & Lorenzo Trapani, 2004. "Cointegration versus Spurious Regression in Heterogeneous Panels," Econometric Society 2004 North American Summer Meetings 266, Econometric Society.
    • Handle: RePEc:ecm:nasm04:266
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    References listed on IDEAS

    as
    1. Snell, Andy, 1998. "Testing for r versus r-1 cointegrating vectors," Journal of Econometrics, Elsevier, vol. 88(1), pages 151-191, November.
    2. Lazarová, štěpána & Trapani, Lorenzo & Urga, Giovanni, 2007. "Common Stochastic Trends And Aggregation In Heterogeneous Panels," Econometric Theory, Cambridge University Press, vol. 23(1), pages 89-105, February.
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    7. Harris, David, 1997. "Principal Components Analysis of Cointegrated Time Series," Econometric Theory, Cambridge University Press, vol. 13(4), pages 529-557, February.
    8. Clive W. J. Granger, 1988. "Aggregation of time series variables-a survey," Discussion Paper / Institute for Empirical Macroeconomics 1, Federal Reserve Bank of Minneapolis.
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    10. Ghose, Devajyoti, 1995. "Linear aggregation in cointegrated systems," Journal of Economic Dynamics and Control, Elsevier, vol. 19(5-7), pages 1011-1032.
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    Keywords

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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