Article ID Journal Published Year Pages File Type
5059208 Economics Letters 2014 4 Pages PDF
Abstract

•The paper considers the very relevant problem of testing for a unit root in panels with incidental trends.•The test of Ng (2008) has attracted much attention in the literature.•In the incidental trends case the Ng (2008) test is size distorted and its power properties are unknown.•The present paper proposes a bias-adjusted version that is shown to outperform the original test.•The bias-adjusted test is shown to suffer from the incidental trends problem.

Ng (2008) shows how the cross-sectional variance of the observed panel data can be used to construct a simple test for the proportion of non-stationary units. However, in the case with incidental trends the test is distorted. The present note shows how the distortions can be substantially reduced by the use of bias-adjustment. It also investigates the local power of the bias-adjusted test, which is shown to suffer from the same incidental trends problem previously only documented for conventional t-tests.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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