Model specification in panel data unit root tests with an unknown break
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Although the impact of structural breaks on testing for unit root has been studied extensively for univariate time-series, such impact on panel data unit root tests is still relatively unknown. A major issue is the choice of model in accommodating different types of break prior to testing for unit root. Model misspecification has been known to affect unit root tests performance in the univariate case but the effect of misspecification on panel tests is still unknown. This paper has two objectives: (i) it proposes a new test for unit root in the presence of structural break for panel data. The test allows the intercepts, the trend coefficients or both to change at different date for different individuals. Moreover, the test allows for the possibility that only some, but not all, of the individuals experienced structural breaks. Under some mild assumptions, the test statistics is shown to be asymptotically normal which greatly facilitates valid inferences. (ii) This paper provides a systematic study on the impact of structural instability on testing for unit root using Monte Carlo Simulation. The results show that correct specification is crucial for unit root testing in the presence of structural instability. In addition, the proportion of individuals experienced structural instability can also affect the performance of the test substantially.
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Chan, Felix ; Pauwels, L.L. (2009)Although the impacts of structural instability on testing for unit root have been studied extensively for univariate time series, such impacts on panel data unit root tests are still relatively unknown. A major issue is ...
Chan, Felix; Mancini-Griffoli, T.; Pauwels, L. (2007)This paper introduces a new test for structural instability among only some individuals at the end of a sample in a panel regression model. Most tests for structural breaks in the literature are appropriate when the break ...
Jaunky, Vishal (2013)© 2013, Springer-Verlag Berlin Heidelberg.This paper investigates whether shocks to copper consumption for 37 countries over the period 1967–2010 are transitory or persistent. A variety of time-series unit root tests is ...