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Stability tests for heterogeneous panel data

  • Félix Chan

    (School of Economics and Finance - Curtin University of Technology)

  • Tommaso Mancini-Griffoli

    (PSE - Paris-Jourdan Sciences Economiques - CNRS - EHESS - École des hautes études en sciences sociales - ENS Paris - École normale supérieure - Paris - École des Ponts ParisTech (ENPC))

  • Laurent L. Pauwels

    (HKMA - Hong Kong Monetary Authority - Hong Kong Monetary Authority, Graduate Institute of International Studies - Graduate Institute of International Studies)

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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Paper provided by HAL in its series PSE Working Papers with number halshs-00589114.

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Date of creation: Dec 2006
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Handle: RePEc:hal:psewpa:halshs-00589114
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  1. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-3, International Conferences on Panel Data.
  2. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
  3. Han, Aaron K & Park, Daekeun, 1989. "Testing for Structural Change in Panel Data: Application to a Study of U.S. Foreign Trade in Manufacturing Goods," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 135-42, February.
  4. Flam, Harry & Nordström, Håkan, 2006. "Trade Volume Effects of the Euro: Aggregate and Sector Estimates," Seminar Papers 746, Stockholm University, Institute for International Economic Studies.
  5. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  6. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
  7. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  8. 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.
  9. Chihwa Kao & Lorenzo Trapani & Giovanni Urga, 2007. "Modelling and Testing for Structural Changes in Panel Cointegration Models with Common and Idiosyncratic Stochastic Trends," Working Papers 0708, Department of Economics and Technology Management, University of Bergamo.
  10. Helge Berger & Volker Nitsch, 2005. "Zooming Out: The Trade Effect of the Euro in Historical Perspective," CESifo Working Paper Series 1435, CESifo Group Munich.
  11. Baldwin, Richard E., 2006. "The euro’s trade effects," Working Paper Series 0594, European Central Bank.
  12. 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.
  13. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
  14. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," Research Department Publications 4339, Inter-American Development Bank, Research Department.
  15. David Barr & Francis Breedon & David Miles, 2003. "Life on the outside: economic conditions and prospects outside euroland," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 573-613, October.
  16. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  17. 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.
  18. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  19. Lúcio Vinhas de Souza, 2002. "Trade Effects of Monetary Integration in Large, Mature Economies: A Primer on the European Monetary Union," Kiel Working Papers 1137, Kiel Institute for the World Economy.
  20. repec:oup:qjecon:v:120:y:2005:i:1:p:1-43 is not listed on IDEAS
  21. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
  22. 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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