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New Tools for Understanding the Local Asymptotic Power of Panel Unit Root Tests

Westerlund, Joakim LU and Larsson, Rolf (2015) In Journal of Econometrics 188(1). p.59-93
Abstract
Motivated by the previously documented discrepancy between actual and predicted power, the present paper provides new tools for analyzing the local asymptotic power of panel unit root tests. These tools are appropriate in general when considering panel data with a dominant autoregressive root of the form ρi = 1 + ciN−κT−τ, where i = 1, ..., N

indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ci, in which existing theories can be seen as mere first-order approximations. The

new theory is applied to study the asymptotic... (More)
Motivated by the previously documented discrepancy between actual and predicted power, the present paper provides new tools for analyzing the local asymptotic power of panel unit root tests. These tools are appropriate in general when considering panel data with a dominant autoregressive root of the form ρi = 1 + ciN−κT−τ, where i = 1, ..., N

indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ci, in which existing theories can be seen as mere first-order approximations. The

new theory is applied to study the asymptotic local power functions of some known test statistics for a unit root. These functions can be expressed in terms of the expansions in the moments of ci, and include existing local power functions as special cases. Monte Carlo evidence is provided to suggest that the newresults go a long way toward bridging

the gap between actual and predicted power. (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
Panel unit root test, Local asymptotic power, Infinite-order approximation, Moment expansion.
in
Journal of Econometrics
volume
188
issue
1
pages
59 - 93
publisher
Elsevier
external identifiers
  • wos:000359028200004
  • scopus:84937942187
ISSN
0304-4076
DOI
10.1016/j.jeconom.2015.03.043
language
English
LU publication?
yes
id
064bad92-5e23-4647-a28a-dd8c7a5dea29 (old id 5257203)
date added to LUP
2015-03-31 16:15:38
date last changed
2017-01-01 04:12:31
@article{064bad92-5e23-4647-a28a-dd8c7a5dea29,
  abstract     = {Motivated by the previously documented discrepancy between actual and predicted power, the present paper provides new tools for analyzing the local asymptotic power of panel unit root tests. These tools are appropriate in general when considering panel data with a dominant autoregressive root of the form ρi = 1 + ciN−κT−τ, where i = 1, ..., N<br/><br>
indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ci, in which existing theories can be seen as mere first-order approximations. The<br/><br>
new theory is applied to study the asymptotic local power functions of some known test statistics for a unit root. These functions can be expressed in terms of the expansions in the moments of ci, and include existing local power functions as special cases. Monte Carlo evidence is provided to suggest that the newresults go a long way toward bridging<br/><br>
the gap between actual and predicted power.},
  author       = {Westerlund, Joakim and Larsson, Rolf},
  issn         = {0304-4076},
  keyword      = {Panel unit root test,Local asymptotic power,Infinite-order approximation,Moment expansion.},
  language     = {eng},
  number       = {1},
  pages        = {59--93},
  publisher    = {Elsevier},
  series       = {Journal of Econometrics},
  title        = {New Tools for Understanding the Local Asymptotic Power of Panel Unit Root Tests},
  url          = {http://dx.doi.org/10.1016/j.jeconom.2015.03.043},
  volume       = {188},
  year         = {2015},
}