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Myths and Facts about Panel Unit Root Tests

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  • Westerlund, Joakim

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Breitung, Jörg

    (University of Bonn)

Abstract

This paper points to some of the common myths and facts that have emerged from 20 years of research into the analysis of unit roots in panel data. Some of these are wellknown, others are not. But they all have in common that if ignored the effects can be very serious. This is demonstrated using both simulations and theoretical reasoning.

Suggested Citation

  • Westerlund, Joakim & Breitung, Jörg, 2009. "Myths and Facts about Panel Unit Root Tests," Working Papers in Economics 380, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0380
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    File URL: http://hdl.handle.net/2077/21050
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    References listed on IDEAS

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    1. repec:bla:obuest:v:61:y:1999:i:0:p:711-47 is not listed on IDEAS
    2. 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.
    3. Jörg Breitung & Samarjit Das, 2005. "Panel unit root tests under cross‐sectional dependence," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(4), pages 414-433, November.
    4. Hyungsik R. Moon & Peter C.B. Phillips, 1999. "Maximum Likelihood Estimation in Panels with Incidental Trends," Cowles Foundation Discussion Papers 1246, Cowles Foundation for Research in Economics, Yale University.
    5. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    6. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    7. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, July.
    8. Edith Madsen, 2003. "Unit root inference in panel data models where the time-series dimension is fixed: A comparison of different tests," CAM Working Papers 2003-13, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    9. Quah, Danny, 1994. "Exploiting cross-section variation for unit root inference in dynamic data," Economics Letters, Elsevier, vol. 44(1-2), pages 9-19.
    10. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    11. Patrick Sevestre & Laszlo Matyas, 2008. "The Econometrics of Panel Data," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00279977, HAL.
    12. Breitung, Jörg & Das, Samarjit, 2008. "Testing For Unit Roots In Panels With A Factor Structure," Econometric Theory, Cambridge University Press, vol. 24(1), pages 88-108, February.
    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. Moon, Hyungsik Roger & Perron, Benoit & Phillips, Peter C.B., 2007. "Incidental trends and the power of panel unit root tests," Journal of Econometrics, Elsevier, vol. 141(2), pages 416-459, December.
    15. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-858, May.
    16. László Mátyás & Patrick Sevestre (ed.), 2008. "The Econometrics of Panel Data," Advanced Studies in Theoretical and Applied Econometrics, Springer, number 978-3-540-75892-1.
    17. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
    18. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, June.
    19. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    20. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    21. 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.
    22. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-287, August.
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    Citations

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    Cited by:

    1. Herwartz, Helmut & Siedenburg, Florian, 2009. "The effects of variance breaks on homogenous panel unit root tests," Economics Working Papers 2009-07, Christian-Albrechts-University of Kiel, Department of Economics.
    2. Pesaran, M. Hashem & Vanessa Smith, L. & Yamagata, Takashi, 2013. "Panel unit root tests in the presence of a multifactor error structure," Journal of Econometrics, Elsevier, vol. 175(2), pages 94-115.
    3. Smeekes, S., 2011. "Bootstrap sequential tests to determine the stationary units in a panel," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. Heckelman, Jac C. & Young, Andrew, 2018. "How Global is Globalization?," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 48(3), August.

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    More about this item

    Keywords

    Non-stationary panel data; Unit root tests; Cross-section dependence; Multidimensional limits;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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