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Title:Dynamic factor extraction of cross-sectional dependence in panel unit root tests PDF Logo
Authors:Kapetanios, George
Issue Date:2004
Series/Report no.:Working Paper, Department of Economics, Queen Mary, University of London 509
Abstract:Recently, considerable emphasis has been placed on the problems arising out of cross-sectional dependence in panel unit root tests. This paper adopts the factor based cross-sectional dependence paradigm of Bai and Ng (2004) but suggests alternative factor extraction methods. Some theoretical results for these methods are provided. Further, a detailed Monte Carlo study of these methods for multiple and persistent factors is undertaken. It is found that results are radically different to the serially uncorrelated single factor case. Tests perform much worse and in some cases it is preferable not to correct at all for cross-sectional dependence.
Subjects:Panel unit root tests, Factor models, Subspace algorithms
JEL:C32
C33
Document Type:Working Paper
Appears in Collections:Working Paper Series, School of Economics and Finance, Queen Mary, University of London

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