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Panel Unit Roots Tests for Cross-Sectionally Correlated Panels: A Monte Carlo Comparison

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  • Luciano Gutierrez

Abstract

This paper deals with the finite sample performance of a set of unit root tests for cross correlated panels. As is well known, univariate tests are not powerful to reject the null of a unit root for the usual economic variables while panel tests, by exploiting the large number of cross-section units, provide a device to increase the power of unit root tests. We investigate the finite sample properties of recently proposed panel unit root tests for cross-sectionally correlated panels. Specifically, the size and power of Choi’s (2002), Bai and Ng’s (2003), Moon and Perron’s (2003), and Phillips and Sul’s (2003) tests are analyzed by a Monte Carlo simulation study. In synthesis, Moon and Perron’s (2003) tests show good size and power for different values of T and N and model specifications. Focusing on Bai and Ng’s (2003) procedure, the simulation study highlights first that the suggested ADF test for the nonstationary analysis of the common factor lack of power, and secondly the simulation shows that the pooled Dickey-Fuller-GLS test provides higher power than the pooled ADF test for the analysis of nonstationary properties of the idiosyncratic components. Choi’s (2002) tests are strongly oversized when the common factor influences the cross-section units heterogeneously. Finally, all the tests lack power when a deterministic trend is included in the data generating process.

Suggested Citation

  • Luciano Gutierrez, 2003. "Panel Unit Roots Tests for Cross-Sectionally Correlated Panels: A Monte Carlo Comparison," Econometrics 0310004, EconWPA.
  • Handle: RePEc:wpa:wuwpem:0310004 Note: Type of Document - pdf; prepared on winme; to print on hp;
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    References listed on IDEAS

    as
    1. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    2. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    3. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-783, August.
    4. 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.
    5. Backus, David K & Kehoe, Patrick J, 1992. "International Evidence of the Historical Properties of Business Cycles," American Economic Review, American Economic Association, vol. 82(4), pages 864-888, September.
    6. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    7. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    8. 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 631-652, Special I.
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    Citations

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    Cited by:

    1. Cem Ertur & Antonio Musolesi, 2017. "Weak and Strong Cross‐Sectional Dependence: A Panel Data Analysis of International Technology Diffusion," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(3), pages 477-503, April.
    2. Amornthum, Somchai & Bonham, Carl S., 2011. "Financial integration in the pacific basin region: RIP by PANIC attack?," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1019-1033, October.
    3. Tim Buyse & Freddy Heylen & Ruben Schoonackers, 2015. "On The Role Of Public Policies And Wage Formation For Private Investment In R&D: A Long-Run Panel Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 15/911, Ghent University, Faculty of Economics and Business Administration.
    4. Kappler, Marcus, 2006. "Panel Tests for Unit Roots in Hours Worked," ZEW Discussion Papers 06-022, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Wang, Zhaohua & Zhang, Bin & Liu, Tongfan, 2016. "Empirical analysis on the factors influencing national and regional carbon intensity in China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 55(C), pages 34-42.
    6. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity For Developing And Developed Countries. What Can We Learn From Non-Stationary Panel Data Models?," Journal of Economic Surveys, Wiley Blackwell, vol. 22(4), pages 752-773, September.
    7. Benoit Perron & Hyungsik Roger Moon, 2007. "An empirical analysis of nonstationarity in a panel of interest rates with factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 383-400.
    8. Westerlund, Joakim & Blomquist, Johan, 2009. "Are Crime Rates Really Stationary?," Working Papers in Economics 381, University of Gothenburg, Department of Economics.
    9. António Afonso & Christophe Rault, 2010. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 731-755, January.
    10. Roberto Basile & Sergio Destefanis & Mauro Costantini, 2005. "Unit root and cointegration tests for cross-sectionally correlated panels - Estimating regional production functions," ERSA conference papers ersa05p171, European Regional Science Association.
    11. Drakos, Anastassios A. & Kouretas, Georgios P. & Stavroyiannis, Stavros & Zarangas, Leonidas, 2017. "Is the Feldstein-Horioka puzzle still with us? National saving-investment dynamics and international capital mobility: A panel data analysis across EU member countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 76-88.
    12. Cristina Brasili & Luciano Gutierrez, 2004. "Regional convergence across European Union," Development and Comp Systems 0402002, EconWPA.
    13. António Afonso & Christophe Rault, 2010. "What do we really know about fiscal sustainability in the EU? A panel data diagnostic," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 145(4), pages 731-755, January.
    14. repec:kap:iaecre:v:17:y:2011:i:1:p:101-115 is not listed on IDEAS
    15. Bernard Fingleton, 2009. "Prediction Using Panel Data Regression with Spatial Random Effects," International Regional Science Review, , vol. 32(2), pages 195-220, April.
    16. Yasemin Özerkek & Sadullah Çelik, 2010. "The Link between Government Spending, Consumer Confidence and Consumption Expenditures in Emerging Market Countries," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(4), pages 471-485, December.
    17. Breitung, Jörg & Pesaran, Mohammad Hashem, 2005. "Unit roots and cointegration in panels," Discussion Paper Series 1: Economic Studies 2005,42, Deutsche Bundesbank.
    18. Brasili, Cristina & Fanfani, Roberto & Gutierrez, Luciano, 2006. "Convergence in the Agricultural Incomes: A Comparison between the US and EU," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25363, International Association of Agricultural Economists.
    19. Gerdie Everaert & Freddy Heylen & Ruben Schoonackers, 2015. "Fiscal policy and TFP in the OECD: measuring direct and indirect effects," Empirical Economics, Springer, vol. 49(2), pages 605-640, September.
    20. Costantini, Mauro & Gutierrez, Luciano, 2013. "Capital mobility and global factor shocks," Economics Letters, Elsevier, vol. 120(3), pages 513-515.
    21. Cern Ertur & Antonio Musolesi, 2012. "Spatial autoregressive spillovers vs unobserved common factors models. A panel data analysis of international technology diffusion," INRA UMR CESAER Working Papers 2012/9, INRA UMR CESAER, Centre d'’Economie et Sociologie appliquées à l'’Agriculture et aux Espaces Ruraux.
    22. repec:ebl:ecbull:v:3:y:2005:i:38:p:1-17 is not listed on IDEAS
    23. Silika Prohl & Joakim Westerlund, 2009. "Using Panel Data to Test for Fiscal Sustainability within the European Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 246-269, June.
    24. Maria Sassi, 2011. "Convergence Across the EU Regions: Economic Composition and Structural Transformation," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 17(1), pages 101-115, February.

    More about this item

    Keywords

    Panel unit root test; Cross section dependence; Monte Carlo Simulation;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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