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Testing for Unit Roots in Dynamic Panels in the Presence of a Deterministic Trend: Re-examining the Unit Root Hypothesis for Real Stock Prices and Dividends

Author

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  • Richard Harris
  • Elias Tzavalis

Abstract

In this paper, we suggest a similar unit root test statistic for dynamic panel data with fixed effects. The test is based on the LM, or score, principle and is derived under the assumption that the time dimension of the panel is fixed, which is typical in many panel data studies. It is shown that the limiting distribution of the test statistic is standard normal. The similarity of the test with respect to both the initial conditions of the panel and the fixed effects is achieved by allowing for a trend in the model using a parameterisation that has the same interpretation under both the null and alternative hypotheses. This parameterisation can be expected to increase the power of the test statistic. Simulation evidence suggests that the proposed test has empirical size that is very close to the nominal level and considerably more power than other panel unit root tests that assume that the time dimension of the panel is large. As an application of the test, we re-examine the stationarity of real stock prices and dividends using disaggregated panel data over a relatively short period of time. Our results suggest that while real stock prices contain a unit root, real dividends are trend stationary.

Suggested Citation

  • Richard Harris & Elias Tzavalis, 2004. "Testing for Unit Roots in Dynamic Panels in the Presence of a Deterministic Trend: Re-examining the Unit Root Hypothesis for Real Stock Prices and Dividends," Econometric Reviews, Taylor & Francis Journals, vol. 23(2), pages 149-166.
    • Handle: RePEc:taf:emetrv:v:23:y:2004:i:2:p:149-166
    DOI: 10.1081/ETC-120039607
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    Citations

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    Cited by:

    1. Issa, Samah & Girardone, Claudia & Snaith, Stuart, 2022. "Banking competition, convergence and growth across macro-regions of MENA," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 534-549.
    2. Robertson, Donald & Sarafidis, Vasilis & Westerlund, Joakim, 2014. "GMM Unit Root Inference in Generally Trending and Cross-Correlated Dynamic Panels," MPRA Paper 53419, University Library of Munich, Germany.
    3. Pengyu Chen & Yiannis Karavias & Elias Tzavalis, 2022. "Panel unit-root tests with structural breaks," Stata Journal, StataCorp LP, vol. 22(3), pages 664-678, September.
    4. In Choi, 2014. "Unit root tests for dependent and heterogeneous micropanels," Working Papers 1404, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    5. Yiannis Karavias & Elias Tzavalis, 2017. "Local power of panel unit root tests allowing for structural breaks," Econometric Reviews, Taylor & Francis Journals, vol. 36(10), pages 1123-1156, November.
    6. Polemis, Michael L., 2017. "Capturing the impact of shocks on the electricity sector performance in the OECD," Energy Economics, Elsevier, vol. 66(C), pages 99-107.

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