Local power of panel unit root tests allowing for structural breaks

Research output: Contribution to journalArticlepeer-review

Authors

Colleges, School and Institutes

External organisations

  • Department of Economics; Athens University of Economics and Business; Athens Greece

Abstract

The asymptotic local power of least squares based fixed-T panel unit root tests allowing for a structural break in their individual effects and/or incidental trends of the AR(1) panel data model is studied. Limiting distributions of these tests are derived under a sequence of local alternatives and analytic expressions show how their means and variances are functions of the break date and the time dimension of the panel. The considered tests have non-trivial local power in a N-1/2 neighborhood of unity when the panel data model includes individual intercepts. For panel data models with incidental trends, the power of the tests becomes trivial in this neighborhood. However, this problem does not always appear if the tests allow for serial correlation in the error term and completely vanishes in the presence of cross section correlation. These results show that fixed-T tests have very different theoretical properties than their large-T counterparts. Monte Carlo experiments demonstrate the usefulness of the asymptotic theory in small samples.

Details

Original languageEnglish
Pages (from-to)1123-1156
Number of pages34
JournalEconometric Reviews
Volume36
Issue number10
Early online date22 Jun 2015
Publication statusPublished - 26 Nov 2017

Keywords

  • Bias correction, Cross section correlation, Fixed T, Incidental trends, Strong factors, C22, C23