New tools for understanding the local asymptotic power of panel unit root tests

Westerlund, Joakim and Larsson, Rolf 2015, New tools for understanding the local asymptotic power of panel unit root tests, Journal of econometrics, vol. 188, no. 1, pp. 59-93, doi: 10.1016/j.jeconom.2015.03.043.

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Title New tools for understanding the local asymptotic power of panel unit root tests
Author(s) Westerlund, JoakimORCID iD for Westerlund, Joakim
Larsson, Rolf
Journal name Journal of econometrics
Volume number 188
Issue number 1
Start page 59
End page 93
Total pages 35
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2015-09
ISSN 0304-4076
Keyword(s) Infinite-order approximation
Local asymptotic power
Moment expansion
Panel unit root test
Social Sciences
Science & Technology
Physical Sciences
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematical Methods In Social Sciences
Summary Abstract 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 ρi=1+ciN-κT-τ, 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 ci, 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.
Language eng
DOI 10.1016/j.jeconom.2015.03.043
Field of Research 150202 Financial Econometrics
Socio Economic Objective 919999 Economic Framework not elsewhere classified
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2015, Elsevier
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Economics
2018 ERA Submission
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