Local power of fixed-T panel unit root tests with serially correlated errors and incidental trends

Yiannis Karavias; Elias Tzavalis

doi:10.1111/jtsa.12144

Local power of fixed-T panel unit root tests with serially correlated errors and incidental trends

Yiannis Karavias, Elias Tzavalis

Economics

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7 Citations (Scopus)

198 Downloads (Pure)

Abstract

The asymptotic local power properties of various fixed T panel unit root tests with serially correlated errors and incidental trends are studied. Asymptotic (over N) local power functions are analytically derived, and through them, the effects of general forms of serial correlation are examined. We find that a test based on an instrumental variables (IV) estimator dominates the tests based on the within-groups (WG) estimator. These functions also show that in the presence of incidental trends, an instrumental variables test based on the first differences of the model has non-trivial local power in an N^(−1/2) neighbourhood of unity. Furthermore, for a test based on the within-groups estimator, although it is found that it has trivial power in the presence of incidental trends, this ceases to be the case if there is serial correlation as well.

Original language	English
Pages (from-to)	222-239
Journal	Journal of Time Series Analysis
Volume	37
Issue number	2
Early online date	24 Jun 2015
DOIs	https://doi.org/10.1111/jtsa.12144
Publication status	Published - 1 Mar 2016

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10.1111/jtsa.12144

Karavias_Local_power_JTSA_2015
This is the peer reviewed version of the following article: Karavias, Y., and Tzavalis, E. (2016) Local Power of Fixed-T Panel Unit Root Tests With Serially Correlated Errors and Incidental Trends. J. Time Ser. Anal., 37: 222–239, which has been published in final form at: http://dx.doi.org/10.1111/jtsa.12144. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Accepted author manuscript, 238 KBLicence: None: All rights reserved

Cite this

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title = "Local power of fixed-T panel unit root tests with serially correlated errors and incidental trends",

abstract = "The asymptotic local power properties of various fixed T panel unit root tests with serially correlated errors and incidental trends are studied. Asymptotic (over N) local power functions are analytically derived, and through them, the effects of general forms of serial correlation are examined. We find that a test based on an instrumental variables (IV) estimator dominates the tests based on the within-groups (WG) estimator. These functions also show that in the presence of incidental trends, an instrumental variables test based on the first differences of the model has non-trivial local power in an N^(−1/2) neighbourhood of unity. Furthermore, for a test based on the within-groups estimator, although it is found that it has trivial power in the presence of incidental trends, this ceases to be the case if there is serial correlation as well.",

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N2 - The asymptotic local power properties of various fixed T panel unit root tests with serially correlated errors and incidental trends are studied. Asymptotic (over N) local power functions are analytically derived, and through them, the effects of general forms of serial correlation are examined. We find that a test based on an instrumental variables (IV) estimator dominates the tests based on the within-groups (WG) estimator. These functions also show that in the presence of incidental trends, an instrumental variables test based on the first differences of the model has non-trivial local power in an N^(−1/2) neighbourhood of unity. Furthermore, for a test based on the within-groups estimator, although it is found that it has trivial power in the presence of incidental trends, this ceases to be the case if there is serial correlation as well.

AB - The asymptotic local power properties of various fixed T panel unit root tests with serially correlated errors and incidental trends are studied. Asymptotic (over N) local power functions are analytically derived, and through them, the effects of general forms of serial correlation are examined. We find that a test based on an instrumental variables (IV) estimator dominates the tests based on the within-groups (WG) estimator. These functions also show that in the presence of incidental trends, an instrumental variables test based on the first differences of the model has non-trivial local power in an N^(−1/2) neighbourhood of unity. Furthermore, for a test based on the within-groups estimator, although it is found that it has trivial power in the presence of incidental trends, this ceases to be the case if there is serial correlation as well.

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Local power of fixed-T panel unit root tests with serially correlated errors and incidental trends

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