Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

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

Joakim Westerlund ()
Additional contact information
Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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.

JEL-codes: C12; C31; C33

26 pages, January 26, 2005

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