Unit Root Inference in Generally Trending and Cross-Correlated Fixed-T Panels
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Publication Date
2016-05-21Journal Title
Journal of Business & Economic Statistics
ISSN
0735-0015
Publisher
Taylor & Francis
Language
English
Type
Article
This Version
AM
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Robertson, D., Sarafidis, V., & Westerlund, J. (2016). Unit Root Inference in Generally Trending and Cross-Correlated Fixed-T Panels. Journal of Business & Economic Statistics https://doi.org/10.1080/07350015.2016.1191501
Abstract
This paper proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multi-factor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, $\sqrt{N}$-consistent and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibrat’s Law.
Keywords
panel data, unit root test, unobserved heterogeneity, common factors, GMM
Sponsorship
Knut and Alice Wallenberg Foundation (Wallenberg Academy Fellowship)
Identifiers
External DOI: https://doi.org/10.1080/07350015.2016.1191501
This record's URL: https://www.repository.cam.ac.uk/handle/1810/256234
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