GC 06/02: Panel unit root tests and the impact of initial observations [Revised to become No. 08/02]

Abstract

In this paper we show that panel unit root tests based on OLS detrending have inferior power relative to tests based on GLS detrending when the deviations of the initial observations from the deterministic components of the series are small. This ranking, however, is reversed for larger deviations. We propose a hybrid panel unit root test that captures the desirable power features of both approaches across the range of initial conditions.

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Authors

David I. Harvey, Stephen J. Leybourne and Nikolaos D. Sakkas

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