Panel Unit Roots Tests for Cross-Sectionally Correlated Panels: A Monte Carlo Comparison
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.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992.
"Efficient Tests for an Autoregressive Unit Root,"
NBER Technical Working Papers
0130, National Bureau of Economic Research, Inc.
- MOON, Hyungsik Roger & PERRON, Benoit., 2002.
"Testing for a Unit Root in Panels with Dynamic Factors,"
Cahiers de recherche
2002-18, Universite de Montreal, Departement de sciences economiques.
- 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.
- Hyungsik Roger MOON & Benoit PERRON, 2002. "Testing For A Unit Root In Panels With Dynamic Factors," Cahiers de recherche 18-2002, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- David K. Backus & Patrick J. Kehoe, 1991.
"International evidence on the historical properties of business cycles,"
145, Federal Reserve Bank of Minneapolis.
- 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 864-88, September.
- David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
- 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.
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Econometric Society World Congress 2000 Contributed Papers
1504, Econometric Society.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
- Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpem:0310004. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.