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Common stochastic trends and aggregation in heterogeneous panels

Lazarova, S., Trapani, L. & Urga, G. (2007). Common stochastic trends and aggregation in heterogeneous panels. Econometric Theory, 23(01), pp. 89-105. doi: 10.1017/s0266466607070041


In nonstationary heterogeneous panels where the number of units is finite and where each unit cointegrates, a large number of conditions needs to be satisfied for cointegration to be preserved in the aggregate relationship. In reality, the conditions most likely will not hold. This paper takes a closer look at what happens when the conditions are violated. In this case, the question of whether an aggregate relationship is observationally equivalent to a cointegrating equation is of particular interest. We derive a measure of the degree of noncointegration of the aggregate estimates, and we explore its asymptotic properties.

Publication Type: Article
Additional Information: Copyright Cambridge University Press, 2007. This version may have been revised following peer review but may be subject to further editorial input by Cambridge University Press.
Publisher Keywords: Aggregation, Cointegration, Heterogeneous Panel
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Finance
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