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A Simple Panel-CADF Test for Unit Roots

  • Costantini, Mauro

    (Department of Economics, University of Vienna, Vienna, Austria)

  • Lupi, Claudio

    (Department SEGeS, Faculty of Economics, University of Molise, Campobasso, Italy)

In this paper we propose a simple extension to the panel case of the covariate-augmented Dickey Fuller (CADF) test for unit roots developed in Hansen (1995). The extension we propose is based on a p-values combination approach that takes into account cross-section dependence. We show that the test is easy to compute, has good size properties and gives power gains with respect to other popular panel approaches. A procedure to compute the asymptotic p-values of Hansen’s CADF test is also a side-contribution of the paper. We also complement Hansen (1995) and Caporale and Pittis (1999) with some new theoretical results. Two empirical applications are carried out for illustration purposes on international data to test the PPP hypothesis and the presence of a unit root in international industrial production indices.

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Paper provided by Institute for Advanced Studies in its series Economics Series with number 261.

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Length: 46 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:ihs:ihsesp:261
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  1. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 322-340, December.
  2. Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
  3. Claudio Lupi, . "Unit Root CADF Testing with R," Journal of Statistical Software, American Statistical Association, vol. 32(i02).
  4. Peter C.B. Phillips & Zhijie Xiao, 1998. "A Primer on Unit Root Testing," Cowles Foundation Discussion Papers 1189, Cowles Foundation for Research in Economics, Yale University.
  5. Westerlund, Joakim & Costantini, Mauro, 2006. "Panel Cointegration and the Neutrality of Money," Working Papers 2006:18, Lund University, Department of Economics.
  6. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc.
  7. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
  8. Elliott, Graham & Jansson, Michael, 2000. "Testing for Unit Roots with Stationary Covariances," University of California at San Diego, Economics Working Paper Series qt47k7z69n, Department of Economics, UC San Diego.
  9. repec:ebl:ecbull:v:3:y:2008:i:26:p:1-11 is not listed on IDEAS
  10. Caporale, Guglielmo Maria & Pittis, Nikitas, 1999. " Unit Root Testing Using Covariates: Some Theory and Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 583-95, November.
  11. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  12. Matei Demetrescu & Uwe Hassler & Adina-Ioana Tarcolea, 2006. "Combining Significance of Correlated Statistics with Application to Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(5), pages 647-663, October.
  13. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
  14. Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics 300., Boston College Department of Economics.
  15. Chang, Yoosoon, 2002. "Nonlinear IV unit root tests in panels with cross-sectional dependency," Journal of Econometrics, Elsevier, vol. 110(2), pages 261-292, October.
  16. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  17. Elliott, Graham & Pesavento, Elena, 2006. "On the Failure of Purchasing Power Parity for Bilateral Exchange Rates after 1973," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1405-1430, September.
  18. Mauro Costantini & Claudio Lupi, 2013. "A Simple Panel-CADF Test for Unit Roots," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 276-296, 04.
  19. Lyhagen, Johan, 2000. "Why not use standard panel unit root test for testing PPP," SSE/EFI Working Paper Series in Economics and Finance 413, Stockholm School of Economics.
  20. Costantini, Mauro & Lupi, Claudio & Popp, Stephan, 2007. "A Panel-CADF Test for Unit Roots," Economics & Statistics Discussion Papers esdp07039, University of Molise, Dept. EGSeI.
  21. Jomana Amara & David Papell, 2006. "Testing for Purchasing Power Parity using stationary covariates," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 29-39.
  22. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 323-343.
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