Unit root tests for cross-sectionally dependent panels: The influence of observed factors

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Abstract

This paper considers a heterogeneous panel unit root model with cross-sectional dependence generated by a factor structure—the factor common to all units being an observed covariate. The model is shown to be Locally Asymptotically Mixed Normal (LAMN), with the random part of the limiting Fisher information due to information generated by the covariate. Because of the LAMN structure, no asymptotically uniformly most powerful test exists; we investigate the asymptotic power properties of the locally optimal test, the best point optimal test, and the conditionally optimal t-test. Although one might expect the best point optimal test to be superior, the performance of the computationally simpler t-test is comparable.
Original languageEnglish
Pages (from-to)11-22
JournalJournal of Statistical Planning and Inference
Volume160
Early online date3 Dec 2014
DOIs
Publication statusPublished - May 2015

Keywords

  • panel unit root test
  • Local Asymptotic Mixed Normality
  • limit experiment
  • asymptotic power envelope

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