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The Effect of Time‐Series and Cross‐Sectional Heterogeneity on Panel Unit Root Test Power
Author(s) -
Geppert John M.,
Jares Timothy E.,
Lavin Angeline M.
Publication year - 2002
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/1475-6803.00021
Subject(s) - unit root , pooling , econometrics , panel data , unit root test , statistics , series (stratigraphy) , monte carlo method , power (physics) , mathematics , time series , cross sectional data , computer science , physics , paleontology , cointegration , quantum mechanics , artificial intelligence , biology
Panel unit root tests represent a significant advancement in addressing the low power of unit root tests by exploiting cross‐sectional and time‐series information. In this article we employ Monte Carlo techniques to quantify the power improvements due to cross‐sectional information and assess test sensitivity to heterogeneous data. Pooling the data alleviates negative effects of slowly adjusting equilibrium relations as well as persistence in the forcing variable. However, if the panel contains a mixture of unit root and stationary series, the power of the test decreases substantially and the interpretation of the results becomes tenuous.