Testing Panel Cointegration with Unobservable Dynamic Common Factors that are Correlated with the Regressors

28 Pages Posted: 19 Jun 2013

See all articles by Jushan Bai

Jushan Bai

New York University (NYU) - Department of Economics

Josep Lluís Carrion-i-Silvestre

University of Barcelona - Department of Econometrics

Date Written: June 2013

Abstract

The paper proposes statistics to test the null hypothesis of no cointegration in panel data when common factors drive the cross‐sectional dependence. We focus on the case in which regressors and the common factors are correlated, although the uncorrelated case is also discussed. Both endogenous and strictly exogenous regressors are considered. The test statistics are shown to have limiting distributions independent of the common factors, making it possible to pool the individual statistics. Simulations indicate that the proposed procedures have good finite sample performance.

Keywords: Common factors, Cross‐sectional dependence, Panel cointegration

Suggested Citation

Bai, Jushan and Carrion-i-Silvestre, Josep Lluís, Testing Panel Cointegration with Unobservable Dynamic Common Factors that are Correlated with the Regressors (June 2013). The Econometrics Journal, Vol. 16, Issue 2, pp. 222-249, 2013, Available at SSRN: https://ssrn.com/abstract=2281705 or http://dx.doi.org/10.1111/ectj.12002

Jushan Bai (Contact Author)

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

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

Josep Lluís Carrion-i-Silvestre

University of Barcelona - Department of Econometrics ( email )

Av. Diagonal 690
Barcelona, E-08034
Spain

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