Robertson, D., Sarafidis, V. and Westerlund, J.

Unit root inference in generally trending and cross-correlated fixed-T panels

Journal of Business and Economic Statistics

(2017)

Abstract: This paper proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multi-factor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, p N-consistent and asymptotically normal for all values of the autoregressive (AR) coefficient, r, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibratâ€™s Law

Keywords: Panel data, unit root test, unobserved heterogeneity, common factors, GMM

JEL Codes: C12, C13, C33, C36

Author links: Donald Robertson

Publisher's Link: http://www.tandfonline.com/doi/full/10.1080/07350015.2016.1191501