Likelihood-Based Cointegration Tests in Heterogeneous Panels

Posted: 5 Sep 2001

See all articles by Rolf Larsson

Rolf Larsson

Stockholm University

Johan Lyhagen

Uppsala University - Department of Information Science

Mickael Lothgren

Stockholm School of Economics - Department of Economic Statistics

Abstract

This paper presents a maximum likelihood panel test of the cointegrating rank in heterogeneous panel models based on the mean of the individual rank trace statistics. The existence of the first two moments of the asymptotic distribution of the individual trace statistic is established. Based on this, the asymptotic distribution of the test statistic is shown to be normal. The small-sample size and power properties are investigated using Monte Carlo simulations. An empirical example for a consumption model including consumption, income and inflation is estimated for 23 OECD countries over the period 1960-1994. The results indicate that two cointegrating relations exist in the system: one containing consumption and income and one inflation only.

Keywords: Panel data, Cointegration, Consumption model

Suggested Citation

Larsson, Rolf and Lyhagen, Johan and Lothgren, Mickael, Likelihood-Based Cointegration Tests in Heterogeneous Panels. Available at SSRN: https://ssrn.com/abstract=281994

Rolf Larsson (Contact Author)

Stockholm University ( email )

Department of Statistics
S-106 91 Stockholm
Sweden

Johan Lyhagen

Uppsala University - Department of Information Science ( email )

S-751 05 Uppsala
Sweden

Mickael Lothgren

Stockholm School of Economics - Department of Economic Statistics ( email )

P.O. Box 6501
S-113 83 Stockholm
Sweden
+46 8 736 92 35 (Phone)
+46 8 34 81 61 (Fax)

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