An LM-type Test for Idiosyncratic Unit Roots in the Exact Factor Model with Nonstationary Common Shocks
(English)Manuscript (preprint) (Other academic)
We consider an exact factor model with integrated factors and propose an LM-type test for unit roots in the idiosyncratic component. We show that, for a fixed number of panel individuals (N) and when the number of time points (T) tends to infinity, the limiting distribution of the LM-type statistic is a weighted sum of independent chi-square-one variables, and when T tends to infinity followed by N tending to infinity, the limiting distribution is standard normal. The test is derived under assumptions that are restrictive just enough to be able to rely on explicit maximum likelihood estimators, and should contribute to the challenging task of deriving likelihood or quasi-likelihood based unit root tests in dynamic factor models.
Panel unit root, Dynamic factors, Maximum likelihood, Lagrange multiplier
Research subject Statistics
IdentifiersURN: urn:nbn:se:uu:diva-207291OAI: oai:DiVA.org:uu-207291DiVA: diva2:647578
ProjectsSolving Macroeconomic Problems Using Non-Stationary Panel Data