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

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This article proposes a new likelihood-based panel cointegration rank test
which extends the test of Örsal and Droge (2014) (henceforth panel SL test)
to dependent panels. The dependence is modelled by unobserved common
factors which affect the variables in each cross-section through heterogeneous
loadings. The data are defactored following the panel analysis of nonstation-
arity in idiosyncratic and common components (PANIC) approach of Bai and
Ng (2004) and the cointegrating rank of the defactored data is then tested by
the panel SL test. AMonte Carlo study demonstrates that the proposed testing
procedure has reasonable size and power properties in finite samples.
Original languageEnglish
JournalEconometric Reviews
Issue number10
Pages (from-to)1033-1050
Number of pages18
Publication statusPublished - 26.11.2018