City Research Online

Abstract

The asymptotic t -test for the long-run average in a heterogeneous nonstationary panel model is derived. The asymptotics of the Least Squares Dummy Variable (LSDV) and of the Pooled-OLS (POLS) estimators for the slope parameter are studied under various circumstances (serial correlation, strong cross-sectional dependence in the errors and in the regressors and mixed stationary/nonstationary errors) and a modified estimator of the asymptotic variance is derived. The asymptotic variance is computed up to a simple transformation of the residual and no nuisance parameters need to be estimated. The resulting t-statistics are shown to have a standard normal limiting distribution. Asymptotic tests based on the standardized version of the t-statistic are shown to have good power properties, and the correct size, even for n as small as 25.

Publication Type:	Article
Additional Information:	NOTICE: this is the author’s version of a work that was accepted for publication in Computational Statistics & Data Analysis. 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 Computational Statistics & Data Analysis Volume 56, Issue 11, November 2012, Pages 3286–3306, http://dx.doi.org/10.1016/j.csda.2011.03.004.
Publisher Keywords:	Panel data; t-test; Asymptotics; Monte Carlo; Common factors
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance
Related URLs:	Author
SWORD Depositor:	Symplectic Administrator

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