The effect of recursive detrending on panel unit root tests

Westerlund, Joakim 2015, The effect of recursive detrending on panel unit root tests, Journal of econometrics, vol. 185, no. 2, pp. 453-467, doi: 10.1016/j.jeconom.2014.06.015.

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Title The effect of recursive detrending on panel unit root tests
Author(s) Westerlund, JoakimORCID iD for Westerlund, Joakim
Journal name Journal of econometrics
Volume number 185
Issue number 2
Start page 453
End page 467
Total pages 15
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2015-04
ISSN 0304-4076
Keyword(s) Deterministic trend
Panel data
Polynomial trend function
Recursive detrending
Unit root test
Social Sciences
Science & Technology
Physical Sciences
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematical Methods In Social Sciences
Summary This paper analyzes the properties of panel unit root tests based on recursively detrended data. The analysis is conducted while allowing for a (potentially) non-linear trend function, which represents a more general consideration than the current state of affairs with (at most) a linear trend. A new test statistic is proposed whose asymptotic behavior under the unit root null hypothesis, and the simplifying assumptions of a polynomial trend and iid errors are shown to be surprisingly simple. Indeed, the test statistic is not only asymptotically independent of the true trend polynomial, but also is in fact unique in that it is independent also of the degree of the fitted polynomial. However, this invariance property does not carry over to the local alternative, under which it is shown that local power is a decreasing function of the trend degree. But while power does decrease, the rate of shrinking of the local alternative is generally constant in the trend degree, which goes against the common belief that the rate of shrinking should be decreasing in the trend degree. The above results are based on simplifying assumptions. To compensate for this lack of generality, a second, robust, test statistic is proposed, whose validity does not require that the trend function is a polynomial or that the errors are iid.
Language eng
DOI 10.1016/j.jeconom.2014.06.015
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 ©2014, 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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