TY - JOUR

T1 - Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence

AU - Arsova, Antonia

AU - Karaman Örsal, Deniz Dilan

PY - 2018/11/26

Y1 - 2018/11/26

N2 - This article proposes a new likelihood-based panel cointegration rank testwhich extends the test of Örsal and Droge (2014) (henceforth panel SL test)to dependent panels. The dependence is modelled by unobserved commonfactors which affect the variables in each cross-section through heterogeneousloadings. The data are defactored following the panel analysis of nonstation-arity in idiosyncratic and common components (PANIC) approach of Bai andNg (2004) and the cointegrating rank of the defactored data is then tested bythe panel SL test. AMonte Carlo study demonstrates that the proposed testingprocedure has reasonable size and power properties in finite samples.

AB - This article proposes a new likelihood-based panel cointegration rank testwhich extends the test of Örsal and Droge (2014) (henceforth panel SL test)to dependent panels. The dependence is modelled by unobserved commonfactors which affect the variables in each cross-section through heterogeneousloadings. The data are defactored following the panel analysis of nonstation-arity in idiosyncratic and common components (PANIC) approach of Bai andNg (2004) and the cointegrating rank of the defactored data is then tested bythe panel SL test. AMonte Carlo study demonstrates that the proposed testingprocedure has reasonable size and power properties in finite samples.

KW - Economics, empirical/statistics

KW - Common factors

KW - cross-sectional dependence

KW - likelihood-ratio

KW - panel cointegration rank test

KW - time trend

UR - http://www.scopus.com/inward/record.url?scp=84978066594&partnerID=8YFLogxK

U2 - 10.1080/07474938.2016.1183070

DO - 10.1080/07474938.2016.1183070

M3 - Journal articles

VL - 37

SP - 1033

EP - 1050

JO - Econometric Reviews

JF - Econometric Reviews

SN - 0747-4938

IS - 10

ER -