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Pooled panel unit root tests and the effect of past initialization

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  • Westerlund, Joakim

Abstract

This paper analyzes the role of initialization when testing for a unit root in panel data, an issue that has received surprisingly little attention in the literature. In fact, most studies assume that the initial value is either zero or bounded. As a response to this, the current paper considers a model in which the initialization is in the past, which is shown to have several distinctive features that makes it attractive, even in comparison to the common time series practice of making the initial value a draw from its unconditional distribution under the stationary alternative. The results have implications not only for theory, but also for applied work. In particular, and in contrast to the time series case, in panels the effect of the initialization need not be negative but can actually lead to improved test performance.
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  • Westerlund, Joakim, 2014. "Pooled panel unit root tests and the effect of past initialization," Working Papers fe_2014_06, Deakin University, Department of Economics.
    • Handle: RePEc:dkn:ecomet:fe_2014_06
    DOI: 10.1080/07474938.2013.833829
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    1. Moon, Hyungsik Roger & Perron, Benoit & Phillips, Peter C.B., 2007. "Incidental trends and the power of panel unit root tests," Journal of Econometrics, Elsevier, vol. 141(2), pages 416-459, December.
    2. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
    3. Elliott, Graham & Muller, Ulrich K., 2006. "Minimizing the impact of the initial condition on testing for unit roots," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 285-310.
    4. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    5. Westerlund, Joakim & Larsson, Rolf, 2012. "Testing for a unit root in a random coefficient panel data model," Journal of Econometrics, Elsevier, vol. 167(1), pages 254-273.
    6. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    7. Hyungsik Roger Moon & Benoit Perron, 2008. "Asymptotic local power of pooled t-ratio tests for unit roots in panels with fixed effects," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 80-104, March.
    8. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    9. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-783, August.
    10. Ulrich K. M¸ller & Graham Elliott, 2003. "Tests for Unit Roots and the Initial Condition," Econometrica, Econometric Society, vol. 71(4), pages 1269-1286, July.
    11. David I. Harvey & Stephen J. Leybourne, 2006. "Power of a Unit‐Root Test and the Initial Condition," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(5), pages 739-752, September.
    12. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
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    Cited by:

    1. Artūras Juodis, 2018. "Rank based cointegration testing for dynamic panels with fixed T," Empirical Economics, Springer, vol. 55(2), pages 349-389, September.

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