Testing for a Unit Root in Panels with Dynamic Factors

Moon, Hyungsik Roger; Perron, Benoit

doi:10.2139/ssrn.296229

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Testing for a Unit Root in Panels with Dynamic Factors

113 Pages Posted: 26 May 2003

See all articles by Hyungsik Roger Moon

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

University of Montreal - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - Center for Interuniversity Research in Econometrics

There are 2 versions of this paper

Date Written: September 2002

Abstract

This paper studies testing for a unit root for large n and T panels in which the cross-sectional units are correlated. To model this cross-sectional correlation, we assume that the data is generated by an unknown number of unobservable common factors. We propose unit root tests in this environment and derive their (Gaussian) asymptotic distribution under the null hypothesis of a unit root and local alternatives. We also show that these tests have no power against the same local alternatives when it is necessary to remove deterministic components. Through Monte Carlo simulations, we provide evidence on the finite sample properties of these new tests.

Note: A revised version of this paper can be found at: http://ssrn.com/abstract=400720

Suggested Citation: Suggested Citation

Moon, Hyungsik Roger and Perron, Benoit, Testing for a Unit Root in Panels with Dynamic Factors (September 2002). Available at SSRN: https://ssrn.com/abstract=296229 or http://dx.doi.org/10.2139/ssrn.296229