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Time-specific disturbances and cross-sectional dependency in a small-sample heterogeneous panel data unit root test

Jönsson, Kristian LU (2006) In Applied Economics 38(11). p.1309-1317
Abstract
In their seminal work, Im et al. (1997, 2003) suggested that time series for several cross-sectional units could be used to increase the power of the Dickey-Fuller unit root test. They argued that when cross-sectional correlation is a problem that can be modelled by a time-specific factor, demeaning across the cross-sectional units can solve the problem. In this study, this proposition is proven valid, but it is also shown that previously supplied standardizing moments are inappropriate when the number of cross-sections are small, causing size to differ from the significance level. To correct this size distortion, the current paper supplies response surface parameters that can be used to obtain moments that are valid when a time-specific... (More)
In their seminal work, Im et al. (1997, 2003) suggested that time series for several cross-sectional units could be used to increase the power of the Dickey-Fuller unit root test. They argued that when cross-sectional correlation is a problem that can be modelled by a time-specific factor, demeaning across the cross-sectional units can solve the problem. In this study, this proposition is proven valid, but it is also shown that previously supplied standardizing moments are inappropriate when the number of cross-sections are small, causing size to differ from the significance level. To correct this size distortion, the current paper supplies response surface parameters that can be used to obtain moments that are valid when a time-specific factor suffices for modelling cross-sectional correlation in the heterogeneous panel data unit root framework. The correct size of the panel data unit root test comes at the cost of a somewhat lower power against a stationary alternative. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Applied Economics
volume
38
issue
11
pages
1309 - 1317
publisher
Routledge
external identifiers
  • wos:000238480600009
  • scopus:33745310525
ISSN
1466-4283
DOI
10.1080/00036840500397671
language
English
LU publication?
yes
id
236e1e7b-60e7-4907-87d5-2b4925875d31 (old id 686573)
date added to LUP
2016-04-01 11:35:48
date last changed
2021-06-30 05:16:34
@article{236e1e7b-60e7-4907-87d5-2b4925875d31,
  abstract     = {In their seminal work, Im et al. (1997, 2003) suggested that time series for several cross-sectional units could be used to increase the power of the Dickey-Fuller unit root test. They argued that when cross-sectional correlation is a problem that can be modelled by a time-specific factor, demeaning across the cross-sectional units can solve the problem. In this study, this proposition is proven valid, but it is also shown that previously supplied standardizing moments are inappropriate when the number of cross-sections are small, causing size to differ from the significance level. To correct this size distortion, the current paper supplies response surface parameters that can be used to obtain moments that are valid when a time-specific factor suffices for modelling cross-sectional correlation in the heterogeneous panel data unit root framework. The correct size of the panel data unit root test comes at the cost of a somewhat lower power against a stationary alternative.},
  author       = {Jönsson, Kristian},
  issn         = {1466-4283},
  language     = {eng},
  number       = {11},
  pages        = {1309--1317},
  publisher    = {Routledge},
  series       = {Applied Economics},
  title        = {Time-specific disturbances and cross-sectional dependency in a small-sample heterogeneous panel data unit root test},
  url          = {http://dx.doi.org/10.1080/00036840500397671},
  doi          = {10.1080/00036840500397671},
  volume       = {38},
  year         = {2006},
}