A Principal Components Analysis of Common Stochastic Trends in Heterogeneous Panel Data: Some Monte Carlo Evidence |
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| Authors: | Stephen Hall,Stepana Lazarova,& Giovanni Urga |
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| Affiliation: | Imperial College, London,;London Business School,;City University Business School, London |
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| Abstract: | In this paper we propose a new approach based on principal components analysis to test for the number of common stochastic trends driving the non-stationary series in a panel data set. This test has the advantage that it is also consistent when there is a mixture of I (0) and I (1) series, making it unnecessary to pre-test the panel for unit root. Furthermore, the test solves the problem of dimensionality encountered in large panel data sets. |
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