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Unit Root Inference in Generally Trending and Cross-Correlated Fixed-T Panels

Robertson, Donald; Sarafidis, Vasilis and Westerlund, Joakim LU (2017) In Journal of Business & Economic Statistics p.1-12
Abstract

This article proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multifactor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, (Formula presented.)-consistent, and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the... (More)

This article proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multifactor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, (Formula presented.)-consistent, and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibrat’s Law.

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author
organization
publishing date
type
Contribution to journal
publication status
epub
subject
in
Journal of Business & Economic Statistics
pages
12 pages
publisher
American Statistical Association
external identifiers
  • scopus:85018162563
ISSN
0735-0015
DOI
10.1080/07350015.2016.1191501
language
English
LU publication?
yes
id
71e2f1a8-a7ef-4dd3-a0b8-bae6d2de54f6
date added to LUP
2016-05-14 14:23:30
date last changed
2017-05-18 09:27:37
@article{71e2f1a8-a7ef-4dd3-a0b8-bae6d2de54f6,
  abstract     = {<p>This article proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multifactor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, (Formula presented.)-consistent, and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibrat’s Law.</p>},
  author       = {Robertson, Donald and Sarafidis, Vasilis and Westerlund, Joakim},
  issn         = {0735-0015},
  language     = {eng},
  month        = {04},
  pages        = {1--12},
  publisher    = {American Statistical Association},
  series       = {Journal of Business & Economic Statistics},
  title        = {Unit Root Inference in Generally Trending and Cross-Correlated Fixed-T Panels},
  url          = {http://dx.doi.org/10.1080/07350015.2016.1191501},
  year         = {2017},
}