Unit Root Testing in Heteroscedastic Panels Using the Cauchy Estimator
The Cauchy estimator of an autoregressive root uses the sign of the first lag as instrumental variable. The resulting IV <italic>t</italic>-type statistic follows a standard normal limiting distribution under a unit root case even under unconditional heteroscedasticity, if the series to be tested has no deterministic trends. The standard normality of the Cauchy test is exploited to obtain a standard normal panel unit root test under cross-sectional dependence and time-varying volatility with an orthogonalization procedure. The article’s analysis of the joint <italic>N</italic>, <italic>T</italic> asymptotics of the test suggests that (1) <italic>N</italic> should be smaller than <italic>T</italic> and (2) its local power is competitive with other popular tests. To render the test applicable when <italic>N</italic> is comparable with, or larger than, <italic>T</italic>, shrinkage estimators of the involved covariance matrix are used. The finite-sample performance of the discussed procedures is found to be satisfactory.
Year of publication: |
2012
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Authors: | Demetrescu, Matei ; Hanck, Christoph |
Published in: |
Journal of Business & Economic Statistics. - Taylor & Francis Journals, ISSN 0735-0015. - Vol. 30.2012, 2, p. 256-264
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Publisher: |
Taylor & Francis Journals |
Saved in:
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