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New tools for understanding the local asymptotic power of panel unit root tests
journal contribution
posted on 2015-09-01, 00:00 authored by Joakim WesterlundJoakim Westerlund, R LarssonAbstract 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.
History
Journal
Journal of econometricsVolume
188Issue
1Pagination
59 - 93Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
0304-4076eISSN
1872-6895Language
engPublication classification
C1 Refereed article in a scholarly journal; C Journal articleCopyright notice
2015, ElsevierUsage metrics
Categories
Keywords
Infinite-order approximationLocal asymptotic powerMoment expansionPanel unit root testSocial SciencesScience & TechnologyPhysical SciencesEconomicsMathematics, Interdisciplinary ApplicationsSocial Sciences, Mathematical MethodsBusiness & EconomicsMathematicsMathematical Methods In Social SciencesStatistics