Unit root tests in panel data: asymptotic and finite-sample properties |
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Institution: | 1. Department of Economics, Faculty of Business, Dokuz Eylul University, 35160 Buca, Izmir, Turkey;2. Department of Economics, Faculty of Economics and Administrative Sciences, Yalova University, 77100, Merkez, Yalova, Turkey |
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Abstract: | We consider pooling cross-section time series data for testing the unit root hypothesis. The degree of persistence in individual regression error, the intercept and trend coefficient are allowed to vary freely across individuals. As both the cross-section and time series dimensions of the panel grow large, the pooled t-statistic has a limiting normal distribution that depends on the regression specification but is free from nuisance parameters. Monte Carlo simulations indicate that the asymptotic results provide a good approximation to the test statistics in panels of moderate size, and that the power of the panel-based unit root test is dramatically higher, compared to performing a separate unit root test for each individual time series. |
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