Spurious regression and residual-based tests for cointegration in panel data

Chihwa Kao

Research output: Contribution to journalArticle

1359 Scopus citations

Abstract

In the first half of the paper I study spurious regressions in panel data. Asymptotic properties of the least-squares dummy variable (LSDV) estimator and other conventional statistics are examined. The asymptotics of LSDV estimator are different from those of the spurious regression in the pure time-series. This has an important consequence for residual-based cointegration tests in panel data, because the null distribution of residual-based cointegration tests depends on the asymptotics of LSDV estimator. In the second half of the paper I study residual-based tests for cointegration regression in panel data. I study Dickey-Fuller (DF) tests and an augmented Dickey-Fuller (ADF) test to test the null of no cointegration. Asymptotic distributions of the tests are derived and Monte Carlo experiments are conducted to evaluate finite sample properties of the proposed tests.

Original languageEnglish (US)
Pages (from-to)1-44
Number of pages44
JournalJournal of Econometrics
Volume90
Issue number1
DOIs
StatePublished - May 1999

Keywords

  • ADF
  • DF
  • LSDV
  • Panel data
  • Residual-based tests
  • Sequential limit theory
  • Spurious regression

ASJC Scopus subject areas

  • Economics and Econometrics

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