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Asymptotic normal tests for integration in panels with cross-dependent units

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Abstract

The asymptotically normal, regression-based LM integration test is adapted for panels with correlated units. The N different units may be integrated of different (fractional) orders under the null hypothesis. The paper first reviews conditions under which the test statistic is asymptotically (as T→∞) normal in a single unit. Then we adopt the framework of seemingly unrelated regression [SUR] for cross-correlated panels, and discuss a panel test statistic based on the feasible generalized least squares [GLS] estimator, which follows a χ 2(N) distribution. Third, a more powerful statistic is obtained by working under the assumption of equal deviations from the respective null in all units. Fourth, feasible GLS requires inversion of sample covariance matrices typically imposing T>N; in addition we discuss alternative covariance matrix estimators for T<N. The usefulness of our results is assessed in Monte Carlo experimentation.

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Authors and Affiliations

  1. Statistics and Econometric Methods, Goethe University Frankfurt, Grüneburgplatz 1, (Postfach RuW 49), 60323, Frankfurt, Germany

    Uwe Hassler, Matei Demetrescu & Adina I. Tarcolea

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  1. Uwe Hassler
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  2. Matei Demetrescu
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  3. Adina I. Tarcolea
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Correspondence to Uwe Hassler.

Additional information

This research was carried out within the subproject HA 3306/1-1 that was part of a larger project with Jörg Breitung (“Integration and Cointegration Analysis with Panel Data”) financed by the German Research Foundation (DFG). The help of Jörg Breitung and three anonymous referees is gratefully acknowledged.

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Hassler, U., Demetrescu, M. & Tarcolea, A.I. Asymptotic normal tests for integration in panels with cross-dependent units. AStA Adv Stat Anal 95, 187–204 (2011). https://doi.org/10.1007/s10182-011-0153-6

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  • DOI: https://doi.org/10.1007/s10182-011-0153-6

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