Panel cointegration with global stochastic trends

Jushan Bai, Chihwa Kao, Serena Ng

Research output: Contribution to journalArticle

118 Scopus citations

Abstract

This paper studies estimation of panel cointegration models with cross-sectional dependence generated by unobserved global stochastic trends. The standard least squares estimator is, in general, inconsistent owing to the spuriousness induced by the unobservable I(1) trends. We propose two iterative procedures that jointly estimate the slope parameters and the stochastic trends. The resulting estimators are referred to respectively as CupBC (continuously-updated and bias-corrected) and the CupFM (continuously-updated and fully-modified) estimators. We establish their consistency and derive their limiting distributions. Both are asymptotically unbiased and (mixed) normal and permit inference to be conducted using standard test statistics. The estimators are also valid when there are mixed stationary and non-stationary factors, as well as when the factors are all stationary.

Original languageEnglish (US)
Pages (from-to)82-99
Number of pages18
JournalJournal of Econometrics
Volume149
Issue number1
DOIs
StatePublished - Apr 2009

Keywords

  • Co-movements
  • Common shocks
  • Cross-sectional dependence
  • Factor analysis
  • Fully-modified estimator
  • Panel data

ASJC Scopus subject areas

  • Economics and Econometrics

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