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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2005:9:
Pooled Unit Root Tests in Panels with a Common Factor

Joakim Westerlund ()

Abstract: This paper proposes new pooled panel unit root tests that are appropriate when the data exhibit cross-sectional dependence that is generated by a single common factor. Using sequential limit arguments, we show that the tests have a limiting normal distribution that is free of nuisance parameters and that they are unbiased against heterogenous local alternatives. Our Monte Carlo results indicate that the tests perform well in comparison to other popular tests that also presumes a common factor structure for the cross-sectional dependence.

Keywords: Pooled Unit Root Tests; Panel Data; Common Factor; Cross-Sectional Dependence; Monte Carlo Simulation.; (follow links to similar papers)

JEL-Codes: C12; C31; C33; (follow links to similar papers)

26 pages, January 26, 2005

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