New tools for understanding the local asymptotic power of panel unit root tests
2015 (English)In: Journal of Econometrics, ISSN 0304-4076, E-ISSN 1872-6895, Vol. 188, no 1, 59-93 p.Article in journal (Refereed) Published
Motivated by the previously documented discrepancy between actual and predicted power, the present paper provides new tools for analyzing the local asymptotic power of panel unit root tests. These tools are appropriate in general when considering panel data with a dominant autoregressive root of the form rho(i)= 1 + ciN(-k)T(-tau), where i = 1,..., N indexes the cross-sectional units, T is the number of time periods and ci is a random local-to-unity parameter. A limit theory for the sample moments of such panel data is developed and is shown to involve infinite-order series expansions in the moments of ch in which existing theories can be seen as mere first-order approximations. The new theory is applied to study the asymptotic local power functions of some known test statistics for a unit root. These functions can be expressed in terms of the expansions in the moments of ci, and include existing local power functions as special cases. Monte Carlo evidence is provided to suggest that the new results go a long way toward bridging the gap between actual and predicted power.
Place, publisher, year, edition, pages
2015. Vol. 188, no 1, 59-93 p.
Panel unit root test, Local asymptotic power, Infinite-order approximation, Moment expansion
Economics and Business Mathematics
IdentifiersURN: urn:nbn:se:uu:diva-261223DOI: 10.1016/j.jeconom.2015.03.043ISI: 000359028200004OAI: oai:DiVA.org:uu-261223DiVA: diva2:852155