Faculty of Economics and Business Administration Publications Database

Asymptotic Normal Tests for Integration in Panels with Cross-Dependent Units

Demetrescu, Matei
Tarcolea, Adina I.
Volume: 95
Number: 2
Pages: 187 - 204
Month: June
ISSN-Print: 1863-8171
Link External Source: Online Version
Year: 2011
Keywords: Heterogeneous Panel; Cross-Correlation; Augmented LM Test; SUR and GLS

The asymptotically normal, regression-based LM integration test is adapted for panels with correlated units. The N different units may be integrated of different (fractional) orders under the null hypothesis. The paper first reviews conditions under which the test statistic is asymptotically (as T??) normal in a single unit. Then we adopt the framework of seemingly unrelated regression [SUR] for cross-correlated panels, and discuss a panel test statistic based on the feasible generalized least squares [GLS] estimator, which follows a ? 2(N) distribution. Third, a more powerful statistic is obtained by working under the assumption of equal deviations from the respective null in all units. Fourth, feasible GLS requires inversion of sample covariance matrices typically imposing T>N; in addition we discuss alternative covariance matrix estimators for T