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Rethinking the Univariate Approach to Panel Unit Root Testing: Using Covariates to Resolve the Incidental Trend Problem: Using Covariates to Resolve the Incidental Trend Problem

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Author

Summary, in English

In an influential paper, Hansen (Rethinking the Univariate Approach to Unit Root

Testing: Using Covariates to Increase Power, Econometric Theory 11, 1148–1171, 1995)

shows that covariate augmentation can lead to substantial power gains when compared

to univariate tests. In this paper we ask if this result extends also to the panel data

context? The answer turns out to be yes, which is maybe not that surprising. What is

surprising, however, is the extent of the power gain, which is shown to be able to more

than outweigh the well-known power loss in the presence of incidental trends. That is,

the covariates have an order effect on the neighborhood around unity for which local

asymptotic power is negligible.

Publishing year

2015

Language

English

Pages

430-443

Publication/Series

Journal of Business & Economic Statistics

Volume

33

Issue

3

Document type

Journal article

Publisher

American Statistical Association

Topic

  • Economics

Keywords

  • Unit root test
  • Panel data
  • Covariates
  • Local asymptotic power
  • Incidental trends.

Status

Published

ISBN/ISSN/Other

  • ISSN: 0735-0015