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Panel cointegration testing in the presence of a time trend

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  • Droge, Bernd
  • Örsal, Deniz Dilan Karaman

Abstract

The purpose of this paper is to propose a new likelihood-based panel cointegration test in the presence of a linear time trend in the data generating process. This new test is an extension of the likelihood ratio (LR) test of Saikkonen & Lütkepohl (2000) for trend-adjusted data to the panel data framework, and is called the panel SL test. The idea is first to take the average of the individual LR (trace) statistics over the cross-sections and then to standardize the test statistic with the appropriate asymptotic moments. Under the null hypothesis, this standardized statistic has a limiting normal distribution as the number of time periods (T) and the number of cross-sections (N) tend to infinity sequentially. In addition to the approximation based on asymptotic moments, a second approximation approach involving the moments from a vector autoregressive process of order one is also introduced. By means of a Monte Carlo study the finite sample size and size-adjusted power properties of the test are investigated. The test presents reasonable size with the increase in T and N, and has high power in small samples.

Suggested Citation

  • Droge, Bernd & Örsal, Deniz Dilan Karaman, 2009. "Panel cointegration testing in the presence of a time trend," SFB 649 Discussion Papers 2009-005, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2009-005
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    References listed on IDEAS

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    Cited by:

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    3. Grith, Maria & Härdle, Wolfgang Karl & Park, Juhyun, 2009. "Shape invariant modelling pricing kernels and risk aversion," SFB 649 Discussion Papers 2009-041, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    4. Antonia Arsova & Deniz Dilan Karaman Örsal, 2018. "Likelihood-based panel cointegration test in the presence of a linear time trend and cross-sectional dependence," Econometric Reviews, Taylor & Francis Journals, vol. 37(10), pages 1033-1050, November.
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    6. Choroś, Barbara & Härdle, Wolfgang Karl & Okhrin, Ostap, 2009. "CDO and HAC," SFB 649 Discussion Papers 2009-038, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
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    10. Daniel Kohlert, 2010. "The determinants of regional real estate returns in the United Kingdom: a vector error correction approach," Journal of Property Research, Taylor & Francis Journals, vol. 27(1), pages 87-117, June.

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    More about this item

    Keywords

    Panel cointegration Test; likelihood ratio; time trend; Monte Carlo study;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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

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