Template-type: ReDif-Paper 1.0
Author-Name: Gengenbach Christian
Author-Name: Palm Franz C.
Author-Name: Urbain Jean-Pierre
Author-workplace-name: METEOR
Title: Panel Cointegration Testing in the Presence of Common Factors
Abstract: Panel unit root and no-cointegration tests that rely on cross-sectional independence of the panel unit experience severe size distortions when this assumption is violated, as has e.g. been shown by Banerjee, Marcellino and Osbat (2004, 2005) via Monte Carlo simulations. Several studies have recently addressed this issue for panel unit root test using a common factor structure to model the cross-sectional dependence, but not much work has been done yet for panel no-cointegration tests. This paper proposes a model for panel no-cointegration using an unobserved common factor structure, following the work on Bai and Ng (2004) for panel unit roots. The model enables us to distinguish two important cases: (i) the case when the non-stationarity in the data is driven by a reduced number of common stochastic trends, and (ii) the case where we have common and idiosyncratic stochastic trends present in the data. We study the asymptotic behavior of some existing, residual-based panel no-cointegration, as suggested by Kao (1999) and Pedroni (1999, 2004). Under the DGP used, the test statistics are no longer asymptotically normal, and convergence occurs at rate T rather than sqrt(N)T as for independent panels. We then examine the properties of residual-based tests for no-cointegration applied to defactored data from which the common factors and individual components have been extracted.
Keywords: econometrics; 
Series: Research Memoranda
Creation-Date: 2005
Number: 050
File-URL: http://digitalarchive.maastrichtuniversity.nl/fedora/objects/guid:cb829d2a-eafd-41ab-9d7a-a5acb562f8fe/datastreams/ASSET1/content
File-Format: application/pdf
File-Size: 373147
Handle: RePEc:unm:umamet:2005050