Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 71: Testing for Panel Unit Roots in the Presence of Spatial Dependency

Kristofer Månsson (), Ghazi Shukur () and Pär Sjölander
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Kristofer Månsson: Department of Econmics, Finance and Statistics, Postal: Jönköping University, Sweden
Ghazi Shukur: Department of Econmics, Finance and Statistics, Postal: Jönköping University, Sweden, and Department of Economics and Statistics, Linnaeus University, Sweden, and HUI Research, Regeringsgatan 60, 103 29 Stockholm
Pär Sjölander: Department of Econmics, Finance and Statistics, Postal: Jönköping University, Sweden

Abstract: In this the size and power properties of the common factor Im, Pesaran and Shin (CIPS), Wald (W), likelihood ratio (LR) and Lagrange multiplier (LM) tests are investigated when the error term follows a spatial error model. The results from the Monte Carlo simulations used in this study, firstly show that the CIPS test over-estimates the nominal size. Secondly, the simulated results shows that the empirical size of the W test approaches the nominal size quickly while the LR and LM tests underestimates the null hypothesis in both small and moderate sample sizes. Finally, the results also show that even though the LM and LR test under-reject the true null hypothesis they have higher power than the W test.

Keywords: Panel data; unit root tests; spatial dependency; Monte Carlo simulations

JEL-codes: C40

16 pages, October 31, 2012

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