Incidental Trends and the Power of Panel Unit Root Tests

Author

Hyungsik Roger MOON, University of Southern California
Benoit PERRRON, University of Montreal
Peter C. B. PHILLIPS, Singapore Management UniversityFollow

Publication Type

Journal Article

Version

publishedVersion

Publication Date

12-2007

Abstract

The asymptotic local power of various panel unit root tests is investigated. The (Gaussian) power envelope is obtained under homogeneous and heterogeneous alternatives. The envelope is compared with the asymptotic power functions for the pooled t-test, the Ploberger and Phillips [2002. Optimal testing for unit roots in panel data. Mimeo] test, and a point optimal test in neighborhoods of unity that are of order n-1/4T-1 and n-1/2T-1, depending on whether or not incidental trends are extracted from the panel data. In the latter case, when the alternative hypothesis is homogeneous across individuals, it is shown that the point optimal test and the Ploberger-Phillips test both achieve the power envelope and are uniformly most powerful, in contrast to point optimal unit root tests for time series. Some simulations examining the finite sample performance of the tests are reported.

Keywords

Asymptotic power envelope, Common point optimal test, Incidental trends, Local asymptotic power function, Panel unit root test

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

141

Issue

2

First Page

416

Last Page

459

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2006.10.003

Publisher

Elsevier

Citation

MOON, Hyungsik Roger; PERRRON, Benoit; and PHILLIPS, Peter C. B.. Incidental Trends and the Power of Panel Unit Root Tests. (2007). Journal of Econometrics. 141, (2), 416-459.
Available at: https://ink.library.smu.edu.sg/soe_research/286

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.1016/j.jeconom.2006.10.003