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Micro versus macro cointegration in heterogeneous panels

Trapani, L. and Urga, G. (2010). Micro versus macro cointegration in heterogeneous panels. Journal of Econometrics, 155(1), pp. 1-18. doi: 10.1016/j.jeconom.2009.07.005

Abstract

We consider the issue of cross-sectional aggregation in nonstationary and heterogeneous panels where each unit cointegrates. We derive asymptotic properties of the aggregate estimate, and necessary and sufficient conditions for cointegration to hold in the aggregate relationship. We then analyze the case when cointegration does not carry through the aggregation process, and we investigate whether the violation of the formal conditions for perfect aggregation can still lead to an aggregate equation that is observationally equivalent to a cointegrated relationship. We derive a measure of the degree of noncointegration of the aggregate relationship and we explore its asymptotic properties. We propose a valid bootstrap approximation of the test. A Monte Carlo exercise evaluates size and power properties of the bootstrap test.

Publication Type: Article
Additional Information: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Econometrics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Econometrics, Volume 155, Issue 1, March 2010, Pages 1–18, http://dx.doi.org/10.1016/j.jeconom.2009.07.005.
Publisher Keywords: Heterogeneous panels; Aggregation; Cointegration; Spurious regression; Bootstrap
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
Related URLs:
URI: http://openaccess.city.ac.uk/id/eprint/6111
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