Title

Testing For Unit Roots In Heterogeneous Panels

Keywords

Finite sample properties; Heterogeneous dynamic panels; T-bar statistics; Tests of unit roots

Abstract

This paper proposes unit root tests for dynamic heterogeneous panels based on the mean of individual unit root statistics. In particular it proposes a standardized t-bar test statistic based on the (augmented) Dickey-Fuller statistics averaged across the groups. Under a general setting this statistic is shown to converge in probability to a standard normal variate sequentially with T (the time series dimension) → ∞, followed by N (the cross sectional dimension) → ∞. A diagonal convergence result with T and N → ∞ while N/T → k, k being a finite non-negative constant, is also conjectured. In the special case where errors in individual Dickey-Fuller (DF) regressions are serially uncorrelated a modified version of the standardized t-bar statistic is shown to be distributed as standard normal as N → ∞ for a fixed T, so long as T > 5 in the case of DF regressions with intercepts and T > 6 in the case of DF regressions with intercepts and linear time trends. An exact fixed N and T test is also developed using the simple average of the DF statistics. Monte Carlo results show that if a large enough lag order is selected for the underlying ADF regressions, then the small sample performances of the t-bar test is reasonably satisfactory and generally better than the test proposed by Levin and Lin (Unpublished manuscript, University of California, San Diego, 1993). © 2003 Elsevier Science B.V. All rights reserved.

Publication Date

7-1-2003

Publication Title

Journal of Econometrics

Volume

115

Issue

1

Number of Pages

53-74

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/S0304-4076(03)00092-7

Socpus ID

0013498103 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/0013498103

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