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The Effect of Time‐Series and Cross‐Sectional Heterogeneity on Panel Unit Root Test Power

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  • John M. Geppert
  • Timothy E. Jares
  • Angeline M. Lavin

Abstract

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.

Suggested Citation

  • John M. Geppert & Timothy E. Jares & Angeline M. Lavin, 2002. "The Effect of Time‐Series and Cross‐Sectional Heterogeneity on Panel Unit Root Test Power," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(3), pages 321-335, September.
    • Handle: RePEc:bla:jfnres:v:25:y:2002:i:3:p:321-335
    DOI: 10.1111/1475-6803.00021
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    References listed on IDEAS

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    1. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220, National Bureau of Economic Research, Inc.
    2. Breitung, Jörg & Meyer, Wolfgang, 1991. "Testing for Unit Roots in Panel Data: Are Wages on Different Bargaining Levels Cointegrated?," Hannover Economic Papers (HEP) dp-164, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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    Cited by:

    1. Narayan, Paresh Kumar & Liu, Ruipeng & Westerlund, Joakim, 2016. "A GARCH model for testing market efficiency," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 121-138.

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