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Stability Tests for Heterogeneous Panel Data

Author

Listed:
  • Felix Chan

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

  • Tommaso Mancini-Griffoli

    (Swiss National Bank, Paris School of Economics (PSE), CEPREMAP)

  • Laurent L. Pauwels

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

Abstract

This paper proposes a new test for structural stability in panels by extending the testing procedure proposed in the seminal work of Andrews (2003) originally developed for time series. The test is robust to non-normal, heteroskedastic and serially correlated errors, and, importantly, allows for the number of post break observations to be small. Moreover, the test accommodates the possibility 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 cross sectional dimension of panel data. This greatly facilitates the calculation of critical values with respect to the test's time series counterpart. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. Finally, the test is illustrated in practice, in a brief study of the euro's effect on trade.

Suggested Citation

  • Felix Chan & Tommaso Mancini-Griffoli & Laurent L. Pauwels, 2008. "Stability Tests for Heterogeneous Panel Data," Working Papers 092008, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:092008
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    References listed on IDEAS

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    Cited by:

    1. Chan, Felix & Pauwels, Laurent, 2011. "Model specification in panel data unit root tests with an unknown break," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 81(7), pages 1299-1309.
    2. Chiu, Yi-Bin & Lee, Chien-Chiang & Sun, Chia-Hung, 2010. "The U.S. trade imbalance and real exchange rate: An application of the heterogeneous panel cointegration method," Economic Modelling, Elsevier, vol. 27(3), pages 705-716, May.
    3. Qian, Junhui & Su, Liangjun, 2016. "Shrinkage estimation of common breaks in panel data models via adaptive group fused Lasso," Journal of Econometrics, Elsevier, vol. 191(1), pages 86-109.
    4. Huanjun Zhu & Vasilis Sarafidis & Mervyn Silvapulle & Jiti Gao, 2015. "Testing for a Structural Break in Dynamic Panel Data Models with Common Factors," Monash Econometrics and Business Statistics Working Papers 20/15, Monash University, Department of Econometrics and Business Statistics.

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    More about this item

    Keywords

    Structural Change; Instability; Cross Sectionally Dependent Errors; Heterogeneous Panels; Monte Carlo; Euro Effect on Trade;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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