Joakim Westerlund
Professor, Programme director – Master of Data Analytics and Business Economics
Likelihood Ratio Tests for a Unit Root in Panels with Random Effects
Author
Summary, in English
Because of the fixed heterogeneity of their models, most panel unit root tests impose restrictions on the rate at which the number of time periods, T, and the number of cross-section units, N, go to infinity. A common example of such a restriction is
N/T→0
, which in practice means that T≫N
, a condition that is not always met. In the current paper the heterogeneity is given a parsimonious random effects specification, which is used as a basis for developing a new likelihood ratio test for a unit root. The asymptotic analysis shows that the new test is valid for all (N,T)
expansion paths satisfying N/T5→0
, which represents a substantial improvement when compared to the existing fixed effects literature.
N/T→0
, which in practice means that T≫N
, a condition that is not always met. In the current paper the heterogeneity is given a parsimonious random effects specification, which is used as a basis for developing a new likelihood ratio test for a unit root. The asymptotic analysis shows that the new test is valid for all (N,T)
expansion paths satisfying N/T5→0
, which represents a substantial improvement when compared to the existing fixed effects literature.
Department/s
- Department of Economics
Publishing year
2017-05-04
Language
English
Pages
627-654
Publication/Series
Statistics
Volume
51
Issue
3
Document type
Journal article
Publisher
Taylor & Francis
Topic
- Social Sciences
- Probability Theory and Statistics
Status
Published
ISBN/ISSN/Other
- ISSN: 0233-1888