On a Likelihood Ratio 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 unobservable common stochastic trends imposed by nonstationary factors, and study, by simulation, the power of the likelihood ratio test for unit roots in the idiosyncratic components. The power of the test is compared with the analogous Lagrange multiplier test and the Fisher-type test proposed by Bai and Ng (A PANIC attack on unit roots and cointegration, Econometrica,72, 1127–1177, 2004). The results suggest that the benefit of the likelihood ratio test is in panels with a small cross-section.
Panel unit root, Dynamic factors, Maximum likelihood, Likelihood ratio
Research subject Statistics
IdentifiersURN: urn:nbn:se:uu:diva-207293OAI: oai:DiVA.org:uu-207293DiVA: diva2:647580
ProjectsSolving Macroeconomic Problems Using Non-Stationary Panel Data