A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model
(English)Manuscript (preprint) (Other academic)
In this paper an exact factor model is considered and a Lagrange multiplier-type test for a homogenous unit root in the idiosyncratic component is derived. It is shown that the asymptotic distribution is independent of the distribution of the common factors, and that the factors are allowed to be integrated, cointegrated, or stationary. In a simulation study, size and power is compared with some popular second generation panel unit root tests. The simulations suggest that the statistic is well-behaved in terms of size and that it is powerful and robust in comparison with existing tests.
Panel unit root, Dynamic factors, Maximum likelihood, Lagrange multiplier
Other Social Sciences not elsewhere specified
IdentifiersURN: urn:nbn:se:uu:diva-233093OAI: oai:DiVA.org:uu-233093DiVA: diva2:750600