Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2006:13: Simple Tests for Cointegration in Dependent Panels with Structural Breaks

Joakim Westerlund () and David Edgerton ()
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
David Edgerton: 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 develops two very simple tests for the null hypothesis of no cointegration in panel data. The tests are general enough to allow for heteroskedastic and serially correlated errors, unit specific time trends, cross-sectional dependence and an unknown structural break in both the intercept and slope of the cointegrated regression, which may be located different dates for different units. The limiting distributions of the tests are derived, and are found to be normal and free of nuisance parameters under the null. A small simulation study is also conducted to investigate the small-sample properties of the tests.

Keywords: Panel Cointegration; Cointegration Test; Structural Break; Cross-Sectional Dependence; Common Factor

JEL-codes: C12; C32; C33

32 pages, First version: May 4, 2006. Revised: January 28, 2007.

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