New Tools for Understanding the Local Asymptotic Power of Panel Unit Root Tests
Author
Summary, in English
Motivated by the previously documented discrepancy between actual and predicted power, the present paper provides new tools for analyzing the local asymptotic power of panel unit root tests. These tools are appropriate in general when considering panel data with a dominant autoregressive root of the form ρi = 1 + ciN−κT−τ, where i = 1, ..., N
indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ci, in which existing theories can be seen as mere first-order approximations. The
new theory is applied to study the asymptotic local power functions of some known test statistics for a unit root. These functions can be expressed in terms of the expansions in the moments of ci, and include existing local power functions as special cases. Monte Carlo evidence is provided to suggest that the newresults go a long way toward bridging
the gap between actual and predicted power.
indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ci, in which existing theories can be seen as mere first-order approximations. The
new theory is applied to study the asymptotic local power functions of some known test statistics for a unit root. These functions can be expressed in terms of the expansions in the moments of ci, and include existing local power functions as special cases. Monte Carlo evidence is provided to suggest that the newresults go a long way toward bridging
the gap between actual and predicted power.
Department/s
Publishing year
2015
Language
English
Pages
59-93
Publication/Series
Journal of Econometrics
Volume
188
Issue
1
Document type
Journal article
Publisher
Elsevier
Topic
- Economics
Keywords
- Panel unit root test
- Local asymptotic power
- Infinite-order approximation
- Moment expansion.
Status
Published
ISBN/ISSN/Other
- ISSN: 0304-4076