IDEAS home Printed from https://ideas.repec.org/p/gla/glaewp/2011_08.html
   My bibliography  Save this paper

A nonlinear panel unit root test under cross section dependence

Author

Listed:
  • Mario Cerrato
  • Christian de Peretti
  • Rolf Larsson
  • Nicholas Sarantis

Abstract

We propose a nonlinear heterogeneous panel unit root test for testing the null hypothesis of unit-roots processes against the alternative that allows a proportion of units to be generated by globally stationary ESTAR processes and a remaining non-zero proportion to be generated by unit root processes. The proposed test is simple to implement and accommodates cross sectional dependence. We show that the distribution of the test statistic is free of nuisance parameters as (N, T) −∞. Monte Carlo simulation shows that our test holds correct size and under the hypothesis that data are generated by globally stationary ESTAR processes has a better power than the recent test proposed in Pesaran [2007]. Various applications are provided

Suggested Citation

  • Mario Cerrato & Christian de Peretti & Rolf Larsson & Nicholas Sarantis, 2011. "A nonlinear panel unit root test under cross section dependence," Working Papers 2011_08, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2011_08
    as

    Download full text from publisher

    File URL: http://www.gla.ac.uk/media/media_197946_en.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-645, August.
    2. Peretto, Pietro F., 1999. "Industrial development, technological change, and long-run growth," Journal of Development Economics, Elsevier, vol. 59(2), pages 389-417, August.
    3. Apte, Prakash & Sercu, Piet & Uppal, Raman, 2004. "The exchange rate and purchasing power parity: extending the theory and tests," Journal of International Money and Finance, Elsevier, vol. 23(4), pages 553-571, June.
    4. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    5. repec:ebl:ecbull:v:3:y:2006:i:14:p:1-12 is not listed on IDEAS
    6. Galor, Oded & Weil, David, 1998. "Population, Technology and Growth: From the Malthusian Regime to the Demographic Transition," CEPR Discussion Papers 1981, C.E.P.R. Discussion Papers.
    7. Pesaran, M. Hashem & Tosetti, Elisa, 2011. "Large panels with common factors and spatial correlation," Journal of Econometrics, Elsevier, vol. 161(2), pages 182-202, April.
    8. Ng, Serena, 2008. "A Simple Test for Nonstationarity in Mixed Panels," Journal of Business & Economic Statistics, American Statistical Association, vol. 26, pages 113-127, January.
    9. Christian Murray & David Papell, 2005. "The purchasing power parity puzzle is worse than you think," Empirical Economics, Springer, vol. 30(3), pages 783-790, October.
    10. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    11. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. "The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-1319, September.
    12. George Kapetanios, 2000. "Testing for a Unit Root against Nonlinear STAR Models," National Institute of Economic and Social Research (NIESR) Discussion Papers 164, National Institute of Economic and Social Research.
    13. Fiaschi, Davide & Lavezzi, Andrea Mario, 2007. "Nonlinear economic growth: Some theory and cross-country evidence," Journal of Development Economics, Elsevier, vol. 84(1), pages 271-290, September.
    14. 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.
    15. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    16. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
    17. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    18. Newbold, Paul, et al, 2001. "U.S. and U.K. Interest Rates, 1890-1934: New Evidence on Structural Breaks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 235-250, May.
    19. Paul De Grauwe & Marianna Grimaldi, 2014. "Heterogeneity of Agents, Transactions Costs and the Exchange Rate," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 2, pages 33-70, World Scientific Publishing Co. Pte. Ltd..
    20. Davidson, Russell & MacKinnon, James G, 1998. "Graphical Methods for Investigating the Size and Power of Hypothesis Tests," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(1), pages 1-26, January.
    21. Oded Galor & David N. Weil, 1998. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition," Working Papers 98-3, Brown University, Department of Economics, revised 19 Aug 1998.
    22. Jamie Emerson & Chihwa Kao, 2006. "Testing for structural change in panel data: GDP growth, consumption growth, and productivity growth," Economics Bulletin, AccessEcon, vol. 3(14), pages 1-12.
    23. David N. Weil & Oded Galor, 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond," American Economic Review, American Economic Association, vol. 90(4), pages 806-828, September.
    24. Roberto Chang & Andres Velasco, 2001. "A Model of Financial Crises in Emerging Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 489-517.
    25. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
    26. Frank, Murray & Gencay, Ramazan & Stengos, Thanasis, 1988. "International chaos?," European Economic Review, Elsevier, vol. 32(8), pages 1569-1584, October.
    27. Donauer, Stefanie & Heinen, Florian & Sibbertsen, Philipp, 2010. "Identification problems in ESTAR models and a new model," Hannover Economic Papers (HEP) dp-444, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    28. P. Newbold & S. J. Leybourne & R. Sollis & M. E. Wohar, 2001. "U.S. and U.K. Interest Rates 1890 - 1934: New Evidence on Structural Breaks," Trinity Economics Papers 20011, Trinity College Dublin, Department of Economics.
    29. Liu, Zhenjuan & Stengos, Thanasis, 1999. "Non-linearities in Cross-Country Growth Regressions: A Semiparametric Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 527-538, Sept.-Oct.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andy Snell & George Kapetanios & Yongcheol Shin, 2004. "Testing for nonlinear cointegration between stock prices and dividends," Money Macro and Finance (MMF) Research Group Conference 2003 90, Money Macro and Finance Research Group.
    2. George Kapetanios & Yongcheol Shin, 2006. "Unit root tests in three-regime SETAR models," Econometrics Journal, Royal Economic Society, vol. 9(2), pages 252-278, July.
    3. Georgios Chortareas & George Kapetanios, 2004. "The Yen Real Exchange Rate may be Stationary after all: Evidence from Non‐linear Unit‐root Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 113-131, February.
    4. George Kapetanios & Yongcheol Shin, 2003. "GLS Detrending-Based Unit Root Tests in Nonlinear STAR and SETAR Frameworks," Edinburgh School of Economics Discussion Paper Series 108, Edinburgh School of Economics, University of Edinburgh.
    5. Månsson, Kristofer & Sjölander, Pär, 2014. "Testing for nonlinear panel unit roots under cross-sectional dependency — With an application to the PPP hypothesis," Economic Modelling, Elsevier, vol. 38(C), pages 121-132.
    6. Christoph Rothe & Philipp Sibbertsen, 2006. "Phillips-Perron-type unit root tests in the nonlinear ESTAR framework," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 90(3), pages 439-456, September.
    7. Daiki Maki, 2008. "The Performance of Variance Ratio Unit Root Tests Under Nonlinear Stationary TAR and STAR Processes: Evidence from Monte Carlo Simulations and Applications," Computational Economics, Springer;Society for Computational Economics, vol. 31(1), pages 77-94, February.
    8. Bec, Frédérique & Zeng, Songlin, 2013. "Are Southeast Asian real exchange rates mean reverting?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 265-282.
    9. Ivan Paya & David Peel, 2005. "The process followed by PPP data. On the properties of linearity tests," Applied Economics, Taylor & Francis Journals, vol. 37(21), pages 2515-2522.
    10. George Kapetanios, 2000. "Testing for a Unit Root against Nonlinear STAR Models," National Institute of Economic and Social Research (NIESR) Discussion Papers 164, National Institute of Economic and Social Research.
    11. Mario Cerrato & Hyunsok Kim & Ronald MacDonald, 2008. "3-Regime symmetric STAR modeling and exchange rate reversion," Working Papers 2009_05, Business School - Economics, University of Glasgow, revised Feb 2009.
    12. Miguel Carvalho & Paulo Júlio, 2012. "Digging out the PPP hypothesis: an integrated empirical coverage," Empirical Economics, Springer, vol. 42(3), pages 713-744, June.
    13. Mario Cerrato & Hyunsok Kim & Ronald Macdonald, 2010. "Three‐Regime Asymmetric STAR Modeling and Exchange Rate Reversion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1447-1467, October.
    14. Tolga Omay & Mübariz Hasanov & Yongcheol Shin, 2018. "Testing for Unit Roots in Dynamic Panels with Smooth Breaks and Cross-Sectionally Dependent Errors," Computational Economics, Springer;Society for Computational Economics, vol. 52(1), pages 167-193, June.
    15. Yunus Aksoy & Kurmas Akdogan, 2006. "Exchange Rates and Fundamentals: Is there a Role for Nonlinearities in Real Time?," Computing in Economics and Finance 2006 12, Society for Computational Economics.
    16. Habibullah, M.S. & Dayang-Afizzah, A.M. & Liew, Venus Khim-Sen & Lim, Kian-Ping, 2008. "Testing nonlinear convergence in Malaysia,1965-2003," MPRA Paper 12110, University Library of Munich, Germany.
    17. Hyginus Leon & Serineh Najarian, 2005. "Asymmetric adjustment and nonlinear dynamics in real exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(1), pages 15-39.
    18. Byeongseon Seo, 2004. "Testing for Nonlinear Adjustment in Smooth Transition Vector Error Correction Models," Econometric Society 2004 Far Eastern Meetings 749, Econometric Society.
    19. Emirmahmutoglu, Furkan & Omay, Tolga, 2014. "Reexamining the PPP hypothesis: A nonlinear asymmetric heterogeneous panel unit root test," Economic Modelling, Elsevier, vol. 40(C), pages 184-190.
    20. Cem Ertur & Antonio Musolesi, 2017. "Weak and Strong Cross‐Sectional Dependence: A Panel Data Analysis of International Technology Diffusion," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 477-503, April.

    More about this item

    Keywords

    Nonlinear panel unit root tests; cross sectional dependence.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2011_08. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Business School Research Team (email available below). General contact details of provider: https://edirc.repec.org/data/dpglauk.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.