Skip to main content
Article thumbnail
Location of Repository

Finite Sample Distributions and Non-normality in Second Generation Panel Unit Root Tests

By Qi Sun

Abstract

As a remarkable advantage, panel unit root testing statistics present Gaussian distribution in the limit rather than the complicated functionals of Wiener processes compared with traditional single time series tests. Therefore, the asymptotic critical values are directly used and the finite sample performance is not given proper attention. In addition, the unit root test literature heavily relies on the normality assumption, when this condition fails, the asymptotic results are no longer valid. \ud This thesis analyzes and finds serious finite sample bias in panel unit root tests and the systematic impact of non-normality on the tests. Using Monte Carlo simulations, in particular, the application of response surface analysis with newly designed functional forms of response surface regressions, the thesis demonstrates the trend patterns of finite sample bias and test bias vary closely in relation to the variation in sample size and the degree of non-normality, respectively. Finite sample critical values are then proposed, more importantly, the finite sample critical values are augmented by the David-Johnson estimate of percentile standard deviation to account for the randomness incurred by stochastic simulations. Non-normality is modeled by the Lévy-Paretian stable distribution. Certain degree of non-normality is found which causes so severe test dis-tortion that the finite sample critical values computed under normality are no longer va-lid. It provides important indications to the reliability of panel unit root test results when empirical data exhibit non-normality. \ud Finally, a panel of OECD country inflation rates is examined for stationarity considering its feature of structural breaks. Instead of constructing structural breaks in panel unit root tests, an alternative and new approach is proposed by treating the breaks as a type of non-normality. With the help of earlier results in the thesis, the study supports the presence of unit root in inflation rates

Publisher: University of Leicester
Year: 2010
OAI identifier: oai:lra.le.ac.uk:2381/8929

Suggested articles

Citations

  1. (1999). A Comparative Study of Unit Root Tests with Panel Data and a new simple test.
  2. (1988). A General Index of Technique Change.
  3. (1987). A Guide to Simulation, Second Edition.
  4. (1976). A Method for Simulating Stable Random Variables.
  5. (1985). A Note on Early Monte Carlo Computations and Scientific Meetings.
  6. (1958). A Note on the Generation of Random Normal Deviates.
  7. (2004). A Panic Attack on Unit Roots and Cointegration.
  8. (2007). A Simple Panel Unit Root Test in the Presence of Cross Section Dependence.
  9. (1998). Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time.
  10. (1997). America’s Peacetime Inflation: The 1970’s,
  11. (2007). An Analysis of Inflation and Interest Rates. New Panel Unit Root Results in the Presence of Structural Breaks.
  12. (1996). An Analysis of the Real Interest Rate under Regime Shifts.
  13. (1971). An Introduction to Probability Theory and Its Applications, Volume 2, Second Edition.
  14. (1995). Analytic Approach to the Problem of Convergence of Truncated Lévy Flights towards the Gaussian Stochastic Process.
  15. (1996). Analyzing Inflation by the Fractionally Integrated ARFIMA-GARCH Model.
  16. (2004). Applied Econometric Time Series, Second Edition.
  17. (1994). Approximate Asymptotic Distribution Functions for Unit-root and Cointegration Tests.
  18. (1999). Artís Ortuňo
  19. (2003). Asymptotic Inference in Time Series Regressions with a Unit Root and Infinite Variance Errors.
  20. (1998). Asymptotic Inference on Cointegrating Rank in Partial Systems.
  21. (1988). Asymptotic Theory of a Test for the Constancy of Regression Coefficients against the Random Walk Alternative.
  22. (2009). Basic Econometrics, Fifth Edition. McGraw-Hill Higher Education,
  23. (2001). Bayesian Analysis of Stochastic Frontier Models,
  24. (2001). Biased Control-variate Estimation.
  25. (2004). Bootstrap Unit Root Tests in Panels with Cross-sectional Dependency.
  26. (2001). Bootstrapping Unit Root Tests with Covariates. (Mimeo,
  27. (2005). Breaks in the Mean Inflation: How They Happen and What to Do with Them. European Central Bank Working Paper No.
  28. (1989). Commodity Prices and Aggregate Inflation: Would Commodity Price Rule Be Worthwhile?.
  29. (2002). Comparison of Forecast Performance for Homogeneous, Heterogeneous and Shrinkage Estimators: Some Empirical Evidence from US Electricity and Natural-gas Consumption.
  30. (2000). Computing Numerical Distribution Functions in Econometrics,
  31. (1995). Conditional Variance for Stable Random Vectors.
  32. (1989). Consistency of Akaike’s Information Criterion for Infinite Variance Autoregressive Processes.
  33. (2008). Consistent Estimation and Order Selection for Nonstationary Autoregressive Process with Stable Innovations.
  34. (1998). Correlation-induction Techniques for Estimating Quantiles in Simulation Experiments.
  35. (1991). Critical Values for Cointegration Tests,
  36. (1997). Critical Values for Unit Root Tests in Seasonal Time Series.
  37. (2005). Cross-sectional and Serial Correlation in a Small-sample Homogeneous Panel Data Unit Root Test.
  38. (2005). Cross-sectional Dependency and Size Distortion in a Small-sample Homogeneous Panel Data Unit Root Test.
  39. (2002). Determining the Number of Factors in Approximate Factor Models.
  40. (1979). Distribution of the Estimates for Autoregressive Time Series With a Unit Root.
  41. (2002). Distributions of Error Correction Tests for Cointegration.
  42. (2003). Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence.
  43. (2008). Econometric Analysis of Panel Data, Fourth Edition.
  44. (2007). Econometric Analysis, Sixth Edition.
  45. (1996). Efficient Tests for an Autoregressive Unit Root.
  46. (1998). Error-correction Mechanism Tests for Cointegration in a Single-equation Framework.
  47. (1995). Estimating Long-run Relationships from Dynamic Heterogeneous Panels.
  48. (1983). Estimating the Stable Index in Order to Measure Tail Thickness: A Critique.
  49. (1993). Estimation in Dynamic Linear Regression Models with Infinite Variance Errors.
  50. (1997). Estimation of Short-run and Long-run Elasticities of Energy Demand from Panel Data Using Shrinkage Estimators.
  51. (1996). Exchange Rate Economics: What’s Wrong with the Conventional Macro Approach?,
  52. (2002). Fear of Floating.
  53. (2007). Financial Econometrics: From Basics to Advanced Modelling Techniques.
  54. (2008). Financial Market Models with Lévy Processes and Time-varying Volatility.
  55. (2001). Finite-sample Critical Values for the Augmented Dickey-Fuller Statistic: a Note on Lag Order.
  56. (1997). Further Evidence from Breaking Trend Functions in Macroeconomic Variables,
  57. (1983). Gasoline Demand in the OECD: an Application of Pooling and Testing Procedures.
  58. (2005). Global Inflation. European Central Bank Working Paper No.
  59. (2007). Globalisation and Inflation in OECD Countries. Jena Economic Research Papers No.055, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
  60. (2007). Globalisation and Inflation: New Cross-country Evidence on the Global Determinants of domestic Inflation. Bank for International Settlements Working Papers No.
  61. (2003). Globalization and Global Disinflation. Federal Reserve Bank of Kansas City, Economic Review, Fourth Quarter,
  62. (1988). How Big is the Random Walk in GNP?.
  63. (2008). Inflation and the Global Economy. Speech delivered at the
  64. (1990). Inflation and Uncertainty at Short and Long Horizons.
  65. (2002). Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy. Reserve Bank of Australia Research Discussion Paper No.
  66. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy.
  67. (1988). Is the Real Interest Rate Stable.
  68. (1997). Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models.
  69. (2001). Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power.
  70. (1995). Lag Order and Critical Values of a Modified Dickey-Fuller Test.
  71. (1995). Lag Order and Critical Values of the Augmented Dickey-Fuller Test.
  72. (1999). Lévy Processes and Infinitely Divisible Distributions.
  73. (1981). Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.
  74. (2007). Mean Reversion of Inflation Rates in 19 OECD Countries: Evidence from Panel Lm Unit Root Tests with Structural Breaks.
  75. (2001). Mean Reversion of Inflation Rates: Evidence from 13 OECD Countries.
  76. (1997). Measuring Tail Thickness to Estimate the Stable Index : A Critique.
  77. (1984). Monetary Strategy with an Elastic Price Standard, in Price stability and Public Policy, 137-159, Federal Reserve Bank of Kansas City.
  78. (2004). Monte Carlo and Quasi-Monte Carlo Methods 2002:
  79. (1984). Monte Carlo Experimentation,
  80. (1997). Monte Carlo Methods for Stochastic Volatility Models,
  81. (2004). Monte Carlo Methods in Financial Engineering.
  82. (1975). Monte Carlo Methods.
  83. (2004). Monte Carlo Statistical Methods, Second Edition.
  84. (1996). Monte Carlo: Concept, Algorithms, and Applications.
  85. (2003). Multivariate Unit Root Tests, Stability and Convergence.
  86. (1997). New Directions in Econometric Practice: General to Specific Modelling, Cointegration, and Vector Autoregression, Second Edition. Edward Elgar,
  87. (1986). Non-Uniform Random Variate Generation.
  88. (2001). Nonlinear Econometric Models with Cointegrated and Deterministically Trending Regressors.
  89. (2002). Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency.
  90. (1992). Nonstationarity and Level Shifts with an Application to Purchasing Power Parity.
  91. (2000). Nonstationary Panel Data Analysis: An Overview of Some Recent Developments.
  92. (2000). Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey.
  93. (1996). Numerical Approximation of the Symmetric Stable Distribution and Density,
  94. (1996). Numerical Distribution Functions for Unit Root and Cointegration tests.
  95. (1999). Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration.
  96. (1998). Numerical Linear Regression with Stable Disturbances,
  97. (1998). On the Conditional Variance-Covariance of Stable Random Vectors, II,
  98. (1951). On the Experimental Attainment of Optimum Conditions (with discussion).
  99. (2003). On the Unit Root Testing Using Nonlinear Instrumental Variables. Working Paper Series,
  100. (1986). One Dimensional Stable Distributions.
  101. (2000). Option Pricing for Truncated Lévy Processes.
  102. (1999). Panel Data Unit Roots and Cointegration: An overview.
  103. (2005). Panel Unit Root Tests Under Cross Sectional Dependence.
  104. (1997). Physics Investigation of Financial Markets.
  105. (1986). Post Simulation Analysis of Monte Carlo Experiments: Interpreting Pesaran's
  106. (1984). Production Frontiers and Panel Data.
  107. (1986). Random Group Effects and the Precision of Regression Estimates.
  108. (1998). Random Number Generation and Monte Carlo Method.
  109. (2005). Regime Changes in International Real Interest Rates: Are They a Monetary Phenomenon?.
  110. (1974). Regression and Autoregression with Infinite Variance.
  111. (1994). Residual-Based Tests for the Null of Stationarity with Applications to U.S. Macroeconomic Time Series. Econometric Theory,
  112. (2003). Response Surface Estimates of Stationarity Tests with a Structural Break.
  113. (1995). Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power.
  114. (1990). Seasonal Integration and Cointegration.
  115. (1993). Seasonal Unit Roots in Aggregate U.S.
  116. (1977). Short-term Interest Rates as Predictors of Inflation: On Testing the Hypothesis that the Real Rate of Interest is Constant.
  117. (2007). Simulation and the Monte Carlo Method, Second Edition.
  118. (1993). Simulation Estimation for Panel Data Models with Limited Dependent Variables,
  119. (1988). Simulation Methods for Queues: An Overview. Queuing Systems: Theory and Applications,
  120. (1997). Simulation of Ruin Probabilities for Subexponential Claims.
  121. (1996). Simulation-Based Econometric Methods.
  122. (2004). Some Cautions on the Use of Panel Methods for Integrated Series of Macroeconomic Data.
  123. (1985). Some Heteroskedasticity-consistent Covariance Matrix Estimators with Improved Finite Sample Properties.
  124. (1992). Some Strange Properties of Panel Data Estimators.
  125. (1994). Stable Non-Gaussian Random Processes.
  126. (2000). Stable Paretian Models in Finance.
  127. (1961). Stable Paretian Random Functions and the Multiplicative Variation of Income.
  128. (1932). Statistical Methods for Research Workers, Oliver and Bond, Fourth Edition.
  129. (1954). Statistical Treatment of Censored Data: Part Ⅰ. Fundamental Formulae.
  130. (1993). Stochastic Simulation for Inference in Nonlinear Errors-in-Variables Models,
  131. (1997). Stochastic Simulation in Physics.
  132. (2000). Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables.
  133. (1988). Testing for a Unit Root in Time Series Regression.
  134. (1988). Testing for Common Trends.
  135. (2005). Testing for PPP: Should we use Panel Methods?.
  136. (2000). Testing for Stationarity in Heterogeneous Panel Data,
  137. (2008). Testing for Stationarity in Inflation Rates: A Re-examination
  138. (2004). Testing for Unit Root in Panels with Dynamic Factors.
  139. (1997). Testing for Unit Roots in Heterogeneous Panels.
  140. (2003). Testing for Unit Roots in Heterogenous Panels.
  141. (1983). Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk.
  142. (1992). Testing Weak Exogeneity and the Order of Cointegration in UK Money Demand Data.
  143. (1987). The Beginning of the Monte Carlo Method.
  144. (1965). The Behavior of Stock-Market Prices.
  145. (1999). The Conquest of American Inflation.
  146. (1977). The Explanation of Inflation:
  147. (2002). The Fine Structure of Asset Returns: An Empirical Investigation.
  148. (1989). The Great Crash, The Oil Shock and the Unit Root Hypothesis.
  149. (1992). The Great Inflation, the Great Disinflation, and Policies for Future Price Stability,
  150. (2009). The Hypothesis of a Unit Root in OECD Inflation Revisited.
  151. (2005). The Inflation Targeting Framework from an Historical Perspective.
  152. (1998). The Man Who Loved Only Numbers: The Story of Paul Erdős and the Search for Mathematical Truth,
  153. (2004). The Modern History of Exchange Rate Arrangements: A Reinterpretation.
  154. (1949). The Monte Carlo Method.
  155. (1998). The Overvaluation of Purchasing Power Parity.
  156. (1930). The theory of interest.
  157. (1982). The Timing of Monetary and Price Changes and the International Transmission of Inflation.
  158. (1983). The United States as an Exogenous Source of World Inflation,
  159. (1963). The Variation of Certain Speculative Prices.
  160. (1967). The Variation of Some Other Speculative Prices.
  161. (1994). Time Series Analysis.
  162. (1990). Time Series Regression with a Unit Root and Infinite Variance errors.
  163. (1987). Time Series Regression with a Unit Root.
  164. (1982). Trends and Random Walks in Macroeconomic Time Series.
  165. (2001). Unit Root Tests for Panel Data.
  166. (2005). Unit Root Tests for Panels
  167. (2009). Unit Root Tests for Panels in the Presence of Short-run and Long-run Dependencies: Nonlinear IV Approach with Fixed N and Large T.
  168. (1992). Unit Root Tests in Panel Data: Asymptotic and Finite-sample Properties.
  169. (2001). Unit Root Tests with Infinite Variance Errors. Econometric Reviews,
  170. (2008). Unit Roots and Cointegration in Panels,
  171. (2003). What Starts Inflation: Evidence from the OECD Countries.
  172. (1985). What Would Nominal GNP Targeting Do to the Business Cycle?.
  173. (1996). Which Moments to Match?.
  174. (1990). Why Has Productivity Growth Declined? Productivity and Public Investment. New England Economic Review,

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.