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A panel cointegrating rank test with structural breaks and cross-sectional dependence

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  • Arsova, Antonia
  • Karaman Örsal, Deniz Dilan

Abstract

A new panel cointegrating rank test which allows for a linear time trend with breaks and cross-sectional dependence is proposed. The new correlation-augmented inverse normal (CAIN) test is based on a modification of the inverse normal method and combines the p-values of individual likelihood-ratio trace statistics by assuming that the number of breaks and break points are known. A Monte Carlo study demonstrates its robustness to cross-sectional dependence and its superior size and power properties compared to other meta-analytic tests used in practice. The test is applied to investigate the long-run relationship between regional house prices and personal income in the United States in view of the structural break introduced by the Global Financial Crisis.

Suggested Citation

  • Arsova, Antonia & Karaman Örsal, Deniz Dilan, 2021. "A panel cointegrating rank test with structural breaks and cross-sectional dependence," Econometrics and Statistics, Elsevier, vol. 17(C), pages 107-129.
    • Handle: RePEc:eee:ecosta:v:17:y:2021:i:c:p:107-129
    DOI: 10.1016/j.ecosta.2020.05.002
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    1. Martin Wagner & Jaroslava Hlouskova, 2010. "The Performance of Panel Cointegration Methods: Results from a Large Scale Simulation Study," Econometric Reviews, Taylor & Francis Journals, vol. 29(2), pages 182-223, April.
    2. Holly, Sean & Pesaran, M. Hashem & Yamagata, Takashi, 2010. "A spatio-temporal model of house prices in the USA," Journal of Econometrics, Elsevier, vol. 158(1), pages 160-173, September.
    3. Carrion-i-Silvestre, Josep Lluís & Kim, Dukpa & Perron, Pierre, 2009. "Gls-Based Unit Root Tests With Multiple Structural Breaks Under Both The Null And The Alternative Hypotheses," Econometric Theory, Cambridge University Press, vol. 25(6), pages 1754-1792, December.
    4. Mohitosh Kejriwal & Pierre Perron, 2010. "A sequential procedure to determine the number of breaks in trend with an integrated or stationary noise component," Journal of Time Series Analysis, Wiley Blackwell, vol. 31(5), pages 305-328, September.
    5. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
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    Cited by:

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    2. Thanh, To Trung & Song, Nguyen Van & Thanh Huyen, Nguyen Thi & Ha, Le Thanh & Lan Huong, Tran Thi, 2024. "An exploration of linkage between climate-related financial policies and natural rents: Evidence from the global database," Resources Policy, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Panel cointegrating rank test; Structural breaks; Cross-sectional dependence; Likelihood-ratio; Time trend;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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