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Testing for Panel Unit Roots in the Presence of an Unknown Structural Break and Cross-Sectional Dependency

Author

Listed:
  • Almasri, Abdullah

    (Karlstad University)

  • Månsson, Kristofer

    (HUI Research)

  • Sjölander, Pär

    (HUI Research)

  • Shukur, Ghazi

    (The Swedish Research Institute of Trade (HUI))

Abstract

This paper introduces two different non-parametric tests for panel unit root based on the wavelet decomposition of time series which may be used in the presence of cross-sectional dependency and an unknown structural break in the data. These tests are compared with the parametric IPS test proposed by Im, Pesaran and Shin (1997) and the Wald test suggested by Taylor and Sarno (1998). By means of Monte Carlo simulations, the results shown that the size and power properties of the new non-parametric tests are robust to cross sectional dependency of the error terms. Furthermore, it is shown that the tests may be used when the time series has an unknown structural break. These tests have also shown to have high power against the alternative hypothesis under the above mentioned conditioned, whiles the IPS and the Wald did not have any power to reject the alternative hypothesis in the presence of structural break in the data.

Suggested Citation

  • Almasri, Abdullah & Månsson, Kristofer & Sjölander, Pär & Shukur, Ghazi, 2012. "Testing for Panel Unit Roots in the Presence of an Unknown Structural Break and Cross-Sectional Dependency," HUI Working Papers 63, HUI Research.
    • Handle: RePEc:hhs:huiwps:0063
    as

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    References listed on IDEAS

    as
    1. Jörg Breitung & Bertrand Candelon, 2005. "Purchasing Power Parity during Currency Crises: A Panel Unit Root Test under Structural Breaks," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 141(1), pages 124-140, April.
    2. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
    3. David Edgerton & Ghazi Shukur, 1999. "Testing autocorrelation in a system perspective testing autocorrelation," Econometric Reviews, Taylor & Francis Journals, vol. 18(4), pages 343-386.
    4. Ghazi Shukur & Panagiotis Mantalos, 2000. "A simple investigation of the Granger-causality test in integrated-cointegrated VAR systems," Journal of Applied Statistics, Taylor & Francis Journals, vol. 27(8), pages 1021-1031.
    5. Fan, Yanqin & Gençay, Ramazan, 2010. "Unit Root Tests With Wavelets," Econometric Theory, Cambridge University Press, vol. 26(5), pages 1305-1331, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Panel unit root test; cross-sectional dependency; structural break; wavelet;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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