Stability tests for heterogeneous panel data
This paper proposes a new test for structural instability in heterogeneous panels. The test builds on the seminal work of Andrews (2003) originally developed for time series. It is robust to non-normal, heteroskedastic and serially correlated errors, and allows for the number of post break observations to be small. Importantly, the test considers the alternative of a break affecting only some - and not all - individuals of the panel. Under mild assumptions the test statistic is shown to be asymptotically normal, thanks to the additional cross sectional dimension of panel data. This greatly facilitates the calculation of critical values. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. The test is then applied to investigate the effect of the Euro on trade.
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- Stefan de Wachter & Elias Tzavalis, 2004.
"Detection of Structural Breaks in Linear Dynamic Panel Data Models,"
505, Queen Mary University of London, School of Economics and Finance.
- De Wachter, Stefan & Tzavalis, Elias, 2012. "Detection of structural breaks in linear dynamic panel data models," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3020-3034.
- Sergio Nardis, 2004. "Currency unions and trade: The special case of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(3), pages 625-649, September.
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Cowles Foundation Discussion Papers
1015, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Sergio Nardis & Claudio Vicarelli, 2003. "Currency unions and trade: The special case of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 139(4), pages 625-649, December.
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