Template-type: ReDif-Paper 1.0
Author-Name: Gengenbach, C.
Author-workplace-name: Quantitative Economics
Author-Name: Palm, F.C.
Author-workplace-name: Quantitative Economics
Author-Name: Urbain, J.R.Y.J.
Author-workplace-name: Quantitative Economics
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<br/>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<br/>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<br/>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 √ NT as for independent panels. We then examine the properties of residual-based tests for nocointegration applied to defactored data from which the common factors and individual components have been extracted.
Series: METEOR Research Memorandum
Creation-Date: 20050101
Number: 051
File-URL: https://cris.maastrichtuniversity.nl/ws/files/1141593/guid-cb829d2a-eafd-41ab-9d7a-a5acb562f8fe-ASSET1.0.pdf
File-Format: application/pdf
File-Size: 373146
Handle: Repec:unm:umamet:2005051
DOI: 10.26481/umamet.2005051