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PANEL UNIT ROOT TESTS WITH CROSS-SECTION DEPENDENCE: A FURTHER INVESTIGATION

Published online by Cambridge University Press:  04 November 2009

Jushan Bai  and
Serena Ng
Jushan Bai*
Affiliation:
Columbia University
Serena Ng
Affiliation:
Columbia University
*
*Address correspondence to Jushan Bai, Department of Economics, Columbia University; 1022 IAB, 420 West 118th Street, New York, NY 10027, USA; e-mail: jushan.bai@columbia.edu.
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Abstract

An effective way to control for cross-section correlation when conducting a panel unit root test is to remove the common factors from the data. However, there remain many ways to use the defactored residuals to construct a test. In this paper, we use the panel analysis of nonstationarity in idiosyncratic and common components (PANIC) residuals to form two new tests. One estimates the pooled autoregressive coefficient, and one simply uses a sample moment. We establish their large-sample properties using a joint limit theory. We find that when the pooled autoregressive root is estimated using data detrended by least squares, the tests have no power. This result holds regardless of how the data are defactored. All PANIC-based pooled tests have nontrivial power because of the way the linear trend is removed.

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ARTICLES
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Econometric Theory , Volume 26 , Issue 4 , August 2010 , pp. 1088 - 1114
Copyright
Copyright © Cambridge University Press 2009

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