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