Forthcoming Papers

• Comment on 'Fast Sparse Regression and Classication' by J. H.Friedman, First author: George Kapetanios and Corresponding author: M. Hashem Pesaran, (2012), forthcoming in International Journal of Forecasting, ref: INTFOR4005
• On the Interpretation of Panel Unit Root Tests, by M. Hashem Pesaran, (2012), forthcoming in Economics Letters
• Aggregation in Large Dynamic Panels, by M. Hashem Pesaran, Alexander Chudik, (2012), forthcoming in Journal of Econometrics
• China's Emergence in the World Economy and Business Cycles in Latin America, by Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci and TengTeng Xu, (2011), CWPE, IZA Discussion Paper, forthcoming in Economia, Journal of the Latin American and Caribbean Economic Association.
• Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit, by M. Hashem Pesaran and Alexander Chudik, (2011), forthcoming in the Econometrics Review.
• Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models, by Cheng Hsiao, M. Hashem Pesaran and Andreas Pick, (2011), forthcoming in the Oxford Bulletin of Economics and Statistics
  
  
  Archives: WP version of published papers
  

• "Comment on `Fast Sparse Regression and Classication' by J. H.Friedman", First author: George Kapetanios and Corresponding author: M. Hashem Pesaran, (2012), forthcoming in International Journal of Forecasting, ref: INTFOR4005
  
  Full Text: http://dx.doi.org/10.1016/j.ijforecast.2012.04.002
  
  
  

• "On the Interpretation of Panel Unit Root Tests", by M. Hashem Pesaran, (2012), forthcoming in Economics Letters
  
  Abstract: Applications of panel unit root tests have become commonplace in empirical economics, yet there are ambiguities as how best to interpret the test results. This note clarifies that rejection of the panel unit root hypothesis should be interpreted as evidence that a statistically significant proportion of the units are stationary. Accordingly, in the event of a rejection, and in applications where the time dimension of the panel is relatively large, it recommends the test outcome to be augmented with an estimate of the proportion of the cross-section units for which the individual unit root tests are rejected. The economic importance of the rejection can be measured by the magnitude of this proportion.
  JEL Classifications: C12, C33, C52
  Key Words: Unit Root tests, Panels, Statistical Significance.
  Full Text: http://www.econ.cam.ac.uk/faculty/pesaran/wp11/Interpretation-Panel-Unit-September-2011.pdf
  
  
  

• "Aggregation in Large Dynamic Panels", by M. Hashem Pesaran, Alexander Chudik, (2012), forthcoming in Journal of Econometrics
  
  Abstract: This paper investigates the problem of aggregation in the case of large linear dynamic panels, where each micro unit is potentially related to all other micro units, and where micro innovations are allowed to be cross sectionally dependent. Following Pesaran (2003), an optimal aggregate function is derived and used (i) to establish conditions under which Granger’s (1980) conjecture regarding the long memory properties of aggregate variables from ‘a very large scale dynamic, econometric model’holds, and (ii) to show which distributional features of micro parameters can be identified from the aggregate model. The paper also derives impulse response functions for the aggregate variables, distinquishing between the effects of macro and aggregated idiosyncratic shocks. Some of the findings of the paper are illustrated by Monte Carlo experiments. The paper also contains an empirical application to consumer price inflation in Germany, France and Italy, and re-examines the extent to which ‘observed’inflation persistence at the aggregate level is due to aggregation and/or common unobserved factors. Our findings suggest that dynamic heterogeneity as well as persistent common factors are needed for explaining the observed persistence of the aggregate inflation.
  JEL Classifications: C43, E31
  Key Words: Aggregation, Large Dynamic Panels, Long Memory,Weak and Strong Cross Section Dependence, VAR Models, Impulse Responses, Factor Models, Inflation Persistenc.
  Full Text: http://www.econ.cam.ac.uk/faculty/pesaran/fp12/Pesaran-&-Chudik-Aggregation-1-March-2012.pdf
  
  

• "China's Emergence in the World Economy and Business Cycles in Latin America", by Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci and TengTeng Xu, (2011), CWPE, IZA Discussion Paper, forthcoming in Economia, Journal of the Latin American and Caribbean Economic Association.
  
  Abstract: The international business cycle is very important for Latin America's economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America. Evidence based on a Global Vector Autoregressive (GVAR) model for 5 large Latin American economies and all major advanced and emerging economies of the world shows that the long-term impact of a China GDP shock on the typical Latin American economy has increased by three times since mid-1990s. At the same time, the long-term impact of a US GDP shock has halved, while the transmission of shocks to Latin America and the rest of emerging Asia (excluding China and India) GDP has not undergone any significant change. Contrary to common wisdom, we find that these changes owe more to the changed impact of China on Latin America's traditional and largest trading partners than to increased direct bilateral trade linkages boosted by the decade-long commodity price boom. These findings help to explain why Latin America did so well during the global crisis, but point to the risks associated with a deceleration in China's economic growth in the future for both Latin America and the rest of the world economy. The evidence reported also suggests that the emergence of China as an important source of world growth might be the driver of the so called "decoupling" of emerging markets business cycle from that of advanced economies reported in the existing literature.
  JEL Classifications: C32, F44, E32, O54
  Key Words: China, GVAR, Great Recession, Emerging Markets, International Business Cycle, Latin America, Trade linkages.
  Full Text: http://www.econ.cam.ac.uk/faculty/pesaran/wp11/CPRX_ECONOMIA_July27.pdf
  
  
  

• "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit", by M. Hashem Pesaran and Alexander Chudik, (2011), forthcoming in the Econometrics Review.
  
  Abstract: This paper extends the analysis of in?nite dimensional vector autoregressive models (IVAR) proposed in Chudik and Pesaran (2010) to the case where one of the variables or the cross section units in the IVAR model is dominant or pervasive. This extension is not straightforward and involves several technical difficulties. The dominant unit influences the rest of the variables in the IVAR model both directly and indirectly, and its effects do not vanish even as the dimension of the model (N) tends to in?nity. The dominant unit acts as a dynamic factor in the regressions of the non-dominant units and yields an in?nite order distributed lag relationship between the two types of units. Despite this it is shown that the effects of the dominant unit as well as those of the neighborhood units can be consistently estimated by running augmented least squares regressions that include distributed lag functions of the dominant unit. The asymptotic distribution of the estimators is derived and their small sample properties investigated by means of Monte Carlo experiments.
  JEL Classifications: C10, C33, C51
  Key Words: IVAR Models, Dominant Units, Large Panels, Weak and Strong Cross Section Dependence, Factor Models
  Full Text: http://www.econ.cam.ac.uk/faculty/pesaran/fp11/PesaranChudik_IVARD_1 April 11.pdf
  
  

• "Diagnostic Tests of Cross Section Independence for Limited Dependent Variable Panel Data Models", by Cheng Hsiao, M. Hashem Pesaran and Andreas Pick, (2011), forthcoming in the Oxford Bulletin of Economics and Statistics
  
  Abstract: This paper considers the problem of testing for cross section independence in limited dependent variable panel data models. It derives a Lagrangian multiplier (LM) test and shows that in terms of generalized residuals of Gourieroux, Monfort, Renault and Trognon (1987) it reduces to the LM test of Breusch and Pagan (1980). Due to the tendency of the LM test to over-reject in panels with large N (cross section dimension), we also consider the application of the cross section dependence test (CD) proposed by Pesaran (2004). In Monte Carlo experiments it emerges that for most combinations of N and T the CD test is correctly sized, whereas the validity of the LM test requires T (time series dimension) to be quite large relative to N. We illustrate the cross-sectional independence tests by an application to a probit panel of roll-call votes in the U. S. Congress and find that the votes display a significant degree of cross section dependence.
  JEL Classifications: C12, C33, C35
  Key Words: Nonlinear panels, cross section dependence, probit and To-bit models
  Full Text: http://www.econ.cam.ac.uk/faculty/pesaran/fp11/CDP_22Jan2011.pdf