Testing for Stationarity with a Break in Panels Where the Time Dimension is Finite

26 Pages Posted: 11 Dec 2012

See all articles by Kaddour Hadri

Kaddour Hadri

Queen's University Belfast

Rolf Larsson

Stockholm University

Yao Rao

The University of Liverpool

Date Written: December 2012

Abstract

In this paper, we consider the case of finite time dimension in the panel stationarity tests with structural breaks. By fixing T, the finite sample properties of the tests for both micro (T small and N large) and macro (both T and N large) panel data are generally greatly improved. More importantly, the derivation of the tests for finite T and N yields Infinity, as opposed to joint asymptotic where N and T yields Infinity simultaneously, avoids the imposition of the rate condition N/T yields 0, making the test valid for any (T, N) blend. Four models corresponding to the usual combination of breaks are considered. The asymptotic distributions of the test are derived under the null hypothesis and are shown to be normally distributed. Their moments for T fixed are derived analytically employing Ghazal’s corollary 1. The case with unknown breaks is also considered. The proposed tests have generally empirical sizes that are very close to the nominal size. The Monte Carlo simulations show that the power of the test statistics increases substantially with N and T.

Keywords: moments of the ratio of two dependent quadratic forms, panel data, stationarity tests, structural breaks

JEL Classification: C12, C14, C23, C52

Suggested Citation

Hadri, Kaddour and Larsson, Rolf and Rao, Yao, Testing for Stationarity with a Break in Panels Where the Time Dimension is Finite (December 2012). Bulletin of Economic Research, Vol. 64, pp. s123-s148, 2012, Available at SSRN: https://ssrn.com/abstract=2187724 or http://dx.doi.org/10.1111/j.1467-8586.2012.00457.x

Kaddour Hadri

Queen's University Belfast ( email )

25 University Square
Belfast, BT7 1NN
Ireland

Rolf Larsson

Stockholm University ( email )

Department of Statistics
S-106 91 Stockholm
Sweden

Yao Rao

The University of Liverpool ( email )

Chatham Street
The University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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