Small sample properties of CIPS panel unit root test under conditional and unconditional heteroscedasticity

HASHIGUCHI, Yoshihiro and HAMORI, Shigeyuki (2010): Small sample properties of CIPS panel unit root test under conditional and unconditional heteroscedasticity.

Abstract

This paper used Monte Carlo simulations to analyze the small sample properties of cross-sectionally augmented panel unit root test (CIPS test). We considered situations involving two types of time-series heteroskedasticity (unconditional and ARCH) in the unobserved common factor and idiosyncratic error term. We found that the CIPS test could be extremely robust versus the two types of heteroskedasticity in the unobserved common factor. However, we found under-size distortion in the case of unconditional heteroskedasticity in the idiosyncratic error term, and conversely, over-size distortion in the case of ARCH. Furthermore, we observed a tendency for its over-size distortion to moderate with low volatility persistence in the ARCH process and exaggerate with high volatility persistence.

• Item Type: MPRA Paper
• Language: English
• Keywords: panel unit root test; CIPS test; heteroskedasticity; cross-section dependence
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

References

Bai J, Ng S. 2004. A panic attack on unit roots and cointegration. Econometrica 72: 1127-1177.

Breitung J, Pesaran MH. 2008. Unit roots and cointegration in panels. In The econometrics of panel data: fundamentals and recent developments in theory and practice, Matyas L, Sevestre P (eds). Springer: Heidelberg.

Cerasa A. 2008. CIPS test for unit root in panel data: further Monte Carlo results. Economics Bulletin 3: 1-13.

Choi I. 2006. Nonstationary panels. In Palgrave Handbooks of Econometrics, vol. 1, Mills TC, Patterson K (eds). Palgrave Macmillan: Basingstoke.

De Silva S, Hadri K, Tremayne AR. 2009. Panel unit root tests in the presence of cross-sectional dependence: finite sample performance and an application. Econometrics Journal 12: 340-366.

Doornik JA. 2006. Ox: An Object-Oriented Matrix Programming Language. Timberlake Consultants: London.

Hamori S, Tokihisa A. 1997. Testing for a unit root in the presence of a variance shift. Economics Letters 57: 245-253.

Im KS, Pesaran MH, Shin Y. 2003. Testing for unit roots in heterogeneous panels. Journal of Econometrics 115: 53-74.

Kim K, Schmidt P. 1993. Unit root tests with conditional heteroskedasticity. Journal of Econometrics 59: 287-300.

Levin A, Lin F, Chu C. 2002. Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics 108: 1-24.

Maddala GS, Wu S. 1999. A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics 61: 631-652.

Moon HR, Perron B. 2004. Testing for a unit root in panels with dynamic factors. Journal of Econometrics 122: 81-126.

O’Connel PGJ. 1998. The overvaluation of purchasing power parity. Journal of International Economics 44: 1-19.

Pesaran MH. 2006. Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74: 967-1012.

Pesaran MH. 2007. A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22: 265-312.

Phillips PCB, Sul D. 2003. Dynamic panel estimation and homogeneity testing under cross section dependence. Econometric Journal 6: 217-259.

Sjölander P. 2008. A new test for simultaneous estimation of unit roots and GARCH risk in the presence of stationary conditional heteroscedasticity disturbances. Applied Financial Economics 18: 527-558.

Strauss J, Yigit T. 2003. Shortfalls of panel unit root testing. Economics Letters 81: 309-313.