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A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Statistics. (Time Series Econometrics)
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Statistics. (Time Series Econometrics)
(English)Manuscript (preprint) (Other academic)
Abstract [en]

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.

Keyword [en]
Panel unit root, Dynamic factors, Maximum likelihood, Lagrange multiplier
National Category
Other Social Sciences not elsewhere specified
Identifiers
URN: urn:nbn:se:uu:diva-233093OAI: oai:DiVA.org:uu-233093DiVA: diva2:750600
Available from: 2014-09-29 Created: 2014-09-29 Last updated: 2016-02-22
In thesis
1. Likelihood-Based Panel Unit Root Tests for Factor Models
Open this publication in new window or tab >>Likelihood-Based Panel Unit Root Tests for Factor Models
2014 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

The thesis consists of four papers that address likelihood-based unit root tests for panel data with cross-sectional dependence arising from common factors.

In the first three papers, we derive Lagrange multiplier (LM)-type tests for common and idiosyncratic unit roots in the exact factor models based on the likelihood function of the differenced data. Also derived are the asymptotic distributions of these test statistics. The finite sample properties of these tests are compared by simulation with other commonly used unit root tests. The results show that our LM-type tests have better size and local power properties.

In the fourth paper, we estimate the spaces spanned by the common factors and the spaces spanned by the idiosyncratic components of the static factor model by using the quasi-maximum likelihood (ML) method and compare it with the widely used method of principal components (PC). Next, by simulation, we compare the size and power properties of established tests for idiosyncratic unit roots, using both the ML and PC methods. Simulation results show that the idiosyncratic unit root tests based on the likelihood-based residuals generally have better size and higher size-adjusted power, especially when the cross-sectional dimension is small and the time series dimension is large.

Place, publisher, year, edition, pages
Uppsala: Acta Universitatis Upsaliensis, 2014. 35 p.
Series
Digital Comprehensive Summaries of Uppsala Dissertations from the Faculty of Social Sciences, ISSN 1652-9030 ; 103
Keyword
Panel unit root, Exact factor model, Dynamic factor model, Maximum likelihood, Principal components, Lagrange multiplier
National Category
Probability Theory and Statistics
Identifiers
urn:nbn:se:uu:diva-233094 (URN)978-91-554-9049-2 (ISBN)
Public defence
2014-11-14, Hörsal 2, Ekonomikum, Kyrkogårdsgatan 10, Uppsala, 13:15 (English)
Opponent
Supervisors
Available from: 2014-10-24 Created: 2014-09-29 Last updated: 2015-01-23

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Solberger, Martin

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