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Panel cointegration testing in the presence of a time trend

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  • Karaman Örsal, Deniz Dilan
  • Droge, Bernd

Abstract

A new likelihood-based panel cointegration test which allows a linear time trend in the data generating process is proposed. The test is an extension of the likelihood ratio type test with trend adjustment prior to testing to the panel data framework. Under the null hypothesis, the standardized statistic has a limiting normal distribution as the number of time periods and the number of cross-sections tend to infinity sequentially. Additionally, an approximation involving the moments based on a vector autoregressive process of order one is introduced. A Monte Carlo study demonstrates that the test has reasonable size and high power in finite samples.

Suggested Citation

  • Karaman Örsal, Deniz Dilan & Droge, Bernd, 2014. "Panel cointegration testing in the presence of a time trend," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 377-390.
    • Handle: RePEc:eee:csdana:v:76:y:2014:i:c:p:377-390
    DOI: 10.1016/j.csda.2012.05.017
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