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Rethinking the Univariate Approach to Panel Unit Root Testing: Using Covariates to Resolve the Incidental Trend Problem: Using Covariates to Resolve the Incidental Trend Problem

Westerlund, Joakim LU (2015) In Journal of Business & Economic Statistics 33(3). p.430-443
Abstract
In an influential paper, Hansen (Rethinking the Univariate Approach to Unit Root

Testing: Using Covariates to Increase Power, Econometric Theory 11, 1148–1171, 1995)

shows that covariate augmentation can lead to substantial power gains when compared

to univariate tests. In this paper we ask if this result extends also to the panel data

context? The answer turns out to be yes, which is maybe not that surprising. What is

surprising, however, is the extent of the power gain, which is shown to be able to more

than outweigh the well-known power loss in the presence of incidental trends. That is,

the covariates have an order effect on the neighborhood around unity for which... (More)
In an influential paper, Hansen (Rethinking the Univariate Approach to Unit Root

Testing: Using Covariates to Increase Power, Econometric Theory 11, 1148–1171, 1995)

shows that covariate augmentation can lead to substantial power gains when compared

to univariate tests. In this paper we ask if this result extends also to the panel data

context? The answer turns out to be yes, which is maybe not that surprising. What is

surprising, however, is the extent of the power gain, which is shown to be able to more

than outweigh the well-known power loss in the presence of incidental trends. That is,

the covariates have an order effect on the neighborhood around unity for which local

asymptotic power is negligible. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Unit root test, Panel data, Covariates, Local asymptotic power, Incidental trends.
in
Journal of Business & Economic Statistics
volume
33
issue
3
pages
430 - 443
publisher
American Statistical Association
external identifiers
  • wos:000358415500010
  • scopus:84937207350
ISSN
0735-0015
DOI
10.1080/07350015.2014.962697
language
English
LU publication?
yes
id
0012f8ec-0dc8-4c45-8b7b-7f7cd7f139b8 (old id 4588925)
date added to LUP
2014-08-20 10:16:38
date last changed
2017-01-01 03:33:00
@article{0012f8ec-0dc8-4c45-8b7b-7f7cd7f139b8,
  abstract     = {In an influential paper, Hansen (Rethinking the Univariate Approach to Unit Root<br/><br>
Testing: Using Covariates to Increase Power, Econometric Theory 11, 1148–1171, 1995)<br/><br>
shows that covariate augmentation can lead to substantial power gains when compared<br/><br>
to univariate tests. In this paper we ask if this result extends also to the panel data<br/><br>
context? The answer turns out to be yes, which is maybe not that surprising. What is<br/><br>
surprising, however, is the extent of the power gain, which is shown to be able to more<br/><br>
than outweigh the well-known power loss in the presence of incidental trends. That is,<br/><br>
the covariates have an order effect on the neighborhood around unity for which local<br/><br>
asymptotic power is negligible.},
  author       = {Westerlund, Joakim},
  issn         = {0735-0015},
  keyword      = {Unit root test,Panel data,Covariates,Local asymptotic power,Incidental trends.},
  language     = {eng},
  number       = {3},
  pages        = {430--443},
  publisher    = {American Statistical Association},
  series       = {Journal of Business & Economic Statistics},
  title        = {Rethinking the Univariate Approach to Panel Unit Root Testing: Using Covariates to Resolve the Incidental Trend Problem: Using Covariates to Resolve the Incidental Trend Problem},
  url          = {http://dx.doi.org/10.1080/07350015.2014.962697},
  volume       = {33},
  year         = {2015},
}