Panel Cointegration with Global Stochastic Trends

Posted: 21 Apr 2011

See all articles by Jushan Bai

Jushan Bai

New York University (NYU) - Department of Economics

Chihwa Kao

Syracuse University

Serena Ng

Columbia Business School - Economics Department

Date Written: April 1, 2009

Abstract

This paper studies estimation of panel co-integration models with cross-sectional dependence Generated by unobserved global stochastic trends. The standard least squares estimator is, in General, inconsistent owing to the spuriousness induced by the unobservable i(1) trends. We propose two iterative procedures that jointly estimate the slope parameters and the stochastic Trends. The resulting estimators are referred to respectively as cupbc (continuously updated and bias-corrected) and the cupfm (continuously updated and fully modified) estimators. We establish their consistency and derive their limiting distributions. Both are asymptotically unbiased and asymptotically normal and permit inference to be conducted using standard test Statistics. The estimators are also valid when there are mixed stationary and non-stationary Factors, as well as when the factors are all stationary.

JEL Classification: C13, C33

Suggested Citation

Bai, Jushan and Kao, Chihwa D. and Ng, Serena, Panel Cointegration with Global Stochastic Trends (April 1, 2009). Journal of Econometrics, Vol. 149, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1815318

Jushan Bai

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10003
United States

Chihwa D. Kao (Contact Author)

Syracuse University ( email )

900 S. Crouse Avenue
426 Eggers Hall Maxwell School of Citizenship and Public Affairs
Syracuse, NY 13244
United States
315-443-3233 (Phone)
315-443-1081 (Fax)

Serena Ng

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

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