City Research Online

Testing for Exogeneity in Cointegrated Panels

Trapani, L. (2015). Testing for Exogeneity in Cointegrated Panels. Oxford Bulletin of Economics and Statistics, 77(4), pp. 475-494. doi: 10.1111/obes.12072

Abstract

This paper proposes a test for the null that, in a cointegrated panel, the long-run correlation between the regressors and the error term is different from zero. As is well known, in such case the OLS estimator is T-consistent, whereas it is NT-consistent when there is no endogeneity. Other estimators can be employed, such as the FM-OLS, that are NT-consistent irrespective of whether exogeneity is present or not. Using the difference between the former and the latter estimator, we construct a test statistic which diverges at a rate N under the null of endogeneity, whilst it is bounded under the alternative of exogeneity, and employ a randomization approach to carry out the test. Monte Carlo evidence shows that the test has the correct size and good power.

Publication Type: Article
Additional Information: This is the peer reviewed version of the following article: Trapani, L. (2015), Testing for Exogeneity in Cointegrated Panels. Oxford Bulletin of Economics and Statistics, 77: 475–494, which is to be published in final form at http://dx.doi.org/10.1111/obes.12072. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Departments: Bayes Business School > Finance
SWORD Depositor:
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