Incidental Trends and the Power of Panel Unit Root Tests

By H. R. Moon, B. Perron, Peter C. B. Phillips. 2007

129 citations recorded by the source corpus.

The asymptotic local powers of various panel unit root tests are investigated. The power envelope is obtained under homogeneous and heterogeneous alternatives. It is compared with asymptotic power functions of the pooled t-test, the Ploberger-Phillips (2002) test, and a point optimal test in neighborhoods of unity that are of order n^{-1/4}T^{-1} and n^{-1/2}T^{-1}, depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/714638c512722a1bb40644d7d8cbe7473220f62b

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In Economics and Econometrics

Citations in the corpus

Random Coefficient Models (2008, background): “Examples of studies that have used the residual factor structure to model cross section dependence include Holtz-Eakin, Newey, and Rosen (1988), Ahn, Lee and Schmidt (2001), Coakley, Fuertes and Smith (2005), Bai and Ng (2004), Kapetanios and Pesaran (2007), Phillips and Sul (2003), Moon and Perron ”
GMM ESTIMATION FOR DYNAMIC PANELS WITH FIXED EFFECTS AND STRONG INSTRUMENTS AT UNITY (2009, unknown): “As is well known, the OLS estimator based on the ‘within’ transformation yields an inconsistent estimator because the transformed regressor and the corresponding error are correlated—see Nickell (1981), among others.”
Large Dimensional Factor Analysis (2008, background): “As suggested by Onatski (2006a) and Heaton and Solo (2006), the larger this ratio, the less precise will be the factor estimates.”
Panel Unit Root Tests in the Presence of a Multifactor Error Structure (2013, unknown): “This paper extends the cross-sectionally augmented panel unit root test (CIPS) proposed by Pesaran (2007) to the case of a multifactor error structure, and proposes a new panel unit root test based on a simple average of cross-sectionally augmented Sargan-Bhargava statistics (CSB).”
The Local Power of the CADF and CIPS Panel Unit Root Tests (2016, background): “…values of N power is typically decreasing in the variance ci, as N increases this effect tends to go away (see, for example, Moon and Perron, 2008; Moon et al., 2007).3 In contrast to these results, according to Table 1, in a vast majority of cases power is actually increasing in 2c , and this is…”