Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence
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Lüneburg: Institut für Volkswirtschaftslehre der Universität Lüneburg, 2013. (Working Paper Series; No. 280).
Research output: Working paper › Working papers
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TY - UNPB
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
PY - 2013/8
Y1 - 2013/8
N2 - This paper proposes a new likelihood-based panel cointegration rank test which extends the test of Örsal & Droge (2012) (henceforth Panel SL test) to allow for cross-sectional dependence. The dependence is modelled by unobserved common factors which affect the variables in each cross-section through heterogeneous loadings. The common components are estimated following the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) approach of Bai & Ng (2004) and the estimates are subtracted from the observations. The cointegrating rank of the defactored data is then tested by the Panel SL test. A Monte Carlo study demonstrates that the proposed testing procedure has reasonable size and power properties in finite samples.
AB - This paper proposes a new likelihood-based panel cointegration rank test which extends the test of Örsal & Droge (2012) (henceforth Panel SL test) to allow for cross-sectional dependence. The dependence is modelled by unobserved common factors which affect the variables in each cross-section through heterogeneous loadings. The common components are estimated following the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) approach of Bai & Ng (2004) and the estimates are subtracted from the observations. The cointegrating rank of the defactored data is then tested by the Panel SL test. A Monte Carlo study demonstrates that the proposed testing procedure has reasonable size and power properties in finite samples.
KW - Economics, empirical/statistics
KW - panel cointegration rank test
KW - cross-sectional dependence
KW - common factors
KW - likelihood-ratio
KW - time trend
M3 - Working papers
T3 - Working Paper Series
BT - Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence
PB - Institut für Volkswirtschaftslehre der Universität Lüneburg
CY - Lüneburg
ER -