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Some Cautions on the Use of the LLC Panel Unit Root Test

  • Westerlund Joakim

    (METEOR)

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    One of the single most cited studies within the field of nonstationary panel data analysis is that of LLC (Levin, Lin and Chu, 2002. Unit Root\linebreak Tests in Panel Data: Asymptotic and Finite Sample Properties. \emph{Journal of Econometrics} 98, 1-24), in which the authors propose a test for a common unit root in the panel. Using both theoretical arguments and simulation evidence, we show that this test generally suffers from serious bias when combined with most commonly used rules for lag length and bandwidth selection. To remedy this bias effect, we propose a slightly modified test that performs well in small samples and that is computationally more convenient than the LLC test.

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    File URL: http://digitalarchive.maastrichtuniversity.nl/fedora/objects/guid:02ed0bad-b14c-4292-b06f-25c2e5035e20/datastreams/ASSET1/content
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    Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 055.

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    Date of creation: 2006
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    Handle: RePEc:unm:umamet:2006055
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    1. Syed A. Basher & Mohammed Mohsin, 2003. ""PPP tests in cointegrated panels: Evidence from Asian developing countries"," Macroeconomics 0310013, EconWPA.
    2. Jesus Crespo-Cuaresma & Jarko Fidrmuc & Ronald MacDonald, 2005. "The monetary approach to exchange rates in the CEECs," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(2), pages 395-416, 04.
    3. 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.
    4. Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
    5. Jenkins, Michael A. & Snaith, Sean M., 2005. "Tests of Purchasing Power Parity via cointegration analysis of heterogeneous panels with consumer price indices," Journal of Macroeconomics, Elsevier, vol. 27(2), pages 345-362, June.
    6. 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.
    7. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
    8. Jönsson, Kristian, 2003. "Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test," Working Papers 2003:10, Lund University, Department of Economics.
    9. Karlsson, Sune & Löthgren, Mickael, 1999. "On the power and interpretation of panel unit root tests," SSE/EFI Working Paper Series in Economics and Finance 299, Stockholm School of Economics.
    10. Kim, Hongkee & Oh, Keun-Yeob & Jeong, Chan-Woo, 2005. "Panel cointegration results on international capital mobility in Asian economies," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 71-82, February.
    11. Jaroslava Hlouskova & Martin Wagner, 2006. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 25(1), pages 85-116.
    12. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
    13. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
    14. Park, Joon Y. & Phillips, Peter C.B., 1988. "Statistical Inference in Regressions with Integrated Processes: Part 1," Econometric Theory, Cambridge University Press, vol. 4(03), pages 468-497, December.
    15. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
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