Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2015:3: PANICCA - PANIC on Cross-Section Averages

Simon Reese () and Joakim Westerlund ()
Additional contact information
Simon Reese: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
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: The cross-section average (CA) augmentation approach of Pesaran (2007) and Pesaran et al. (2013), and the principal components-based panel analysis of non-stationarity in idiosyncratic and common components (PANIC) of Bai and Ng (2004, 2010) are among the most popular “second-generation” approaches for cross-section correlated panels. One feature of these approaches is that they have different strengths and weaknesses. The purpose of the current paper is to develop PANICCA, a combined approach that exploits the strengths of both CA and PANIC.

Keywords: PANIC; cross-section average augmentation; unit root test; cross-section dependence; common factors

JEL-codes: C12; C13; C33; C36

39 pages, First version: October 20, 2014. Revised: March 24, 2015.

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