Time-specific disturbances in a panel stationarity test
Abstract:In this article, we investigate the performance of a panel data stationarity test when cross-sectional correlation is modelled by a time-specific factor. Size distortions, that occur especially when the number of cross sections is small, are documented. To eliminate these distortions, a new set of critical values is supplied. When investigating the rejection frequency under the alternative hypothesis, it is found that the panel data stationarity test that uses the supplied critical values maintain good power characteristics even when only a subset of the cross-sectional units have a unit root.
Document Type: Research Article
Affiliations: National Institute of Economic Research, SE-103 62 Stockholm, Sweden
Publication date: March 1, 2011