Scandinavian Working Papers in Economics

HUI Working Papers,
HUI Research

No 63: Testing for Panel Unit Roots in the Presence of an Unknown Structural Break and Cross-Sectional Dependency

Abdullah Almasri , Kristofer Månsson (), Pär Sjölander and Ghazi Shukur
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Abdullah Almasri: Karlstad University, Postal: Department of Economics and Statistics, Karlstad, Sweden
Kristofer Månsson: HUI Research, Postal: Regeringsgatan 60, 103 29 Stockholm, Sweden, Jönköping International Business School, Department of Economics, Finance and Statistics, Jönköping, Sweden
Pär Sjölander: HUI Research, Postal: Regeringsgatan 60, 103 29 Stockholm, Sweden, Jönköping International Business School, Department of Economics, Finance and Statistics, Jönköping, Sweden
Ghazi Shukur: The Swedish Research Institute of Trade (HUI), Postal: The Swedish Research Institute of Trade (HUI), Regeringsgatan 60, 103 29 Stockholm, Sweden, Jönköping International Business School, Department of Economics, Finance and Statistics, Jönköping, Sweden, Linnaeus University, Department of Economics and Statistics, Sweden

Abstract: This paper introduces two different non-parametric tests for panel unit root based on the wavelet decomposition of time series which may be used in the presence of cross-sectional dependency and an unknown structural break in the data. These tests are compared with the parametric IPS test proposed by Im, Pesaran and Shin (1997) and the Wald test suggested by Taylor and Sarno (1998). By means of Monte Carlo simulations, the results shown that the size and power properties of the new non-parametric tests are robust to cross sectional dependency of the error terms. Furthermore, it is shown that the tests may be used when the time series has an unknown structural break. These tests have also shown to have high power against the alternative hypothesis under the above mentioned conditioned, whiles the IPS and the Wald did not have any power to reject the alternative hypothesis in the presence of structural break in the data.

Keywords: Panel unit root test; cross-sectional dependency; structural break; wavelet

JEL-codes: C14

17 pages, April 18, 2012

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