Incidental Trends and the Power of Panel Unit Root Tests

64 Pages Posted: 5 Sep 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

Benoit Perron

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

Peter C. B. Phillips

University of Auckland Business School; Yale University - Cowles Foundation; Singapore Management University - School of Economics

Date Written: October 2005

Abstract

The asymptotic local powers of various panel unit root tests are investigated. The power envelope is obtained under homogeneous and heterogeneous alternatives. It is compared with asymptotic power functions of the pooled t-test, the Ploberger-Phillips (2002) test, and a point optimal test in neighborhoods of unity that are of order n^{-1/4}T^{-1} and n^{-1/2}T^{-1}, depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported.

Keywords: Asymptotic power envelope, common point, optimal test, heterogeneous alternatives, incidental trends, local to unity, power function, panel unit root test

JEL Classification: C22, C23

Suggested Citation

Moon, Hyungsik Roger and Perron, Benoit and Phillips, Peter C. B., Incidental Trends and the Power of Panel Unit Root Tests (October 2005). Cowles Foundation Discussion Paper No. 1435, USC CLEO Research Paper No. C03-17, IEPR Working Paper No. 05-38, Available at SSRN: https://ssrn.com/abstract=434720 or http://dx.doi.org/10.2139/ssrn.434720

Hyungsik Roger Moon

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Benoit Perron

University of Montreal - Department of Economics ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
514-343-2126 (Phone)
514-343-5831 (Fax)

Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )

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Montreal H3A 2M8, Quebec
Canada

University of Montreal - Center for Interuniversity Research in Econometrics ( email )

C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

Peter C. B. Phillips (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand
+64 9 373 7599 x7596 (Phone)

Yale University - Cowles Foundation ( email )

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United States
203-432-3695 (Phone)
203-432-5429 (Fax)

Singapore Management University - School of Economics

90 Stamford Road
178903
Singapore

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