Unit root tests for panel data with AR(1) errors and small T
Article first published online: 16 FEB 2012
© 2012 The Author(s). The Econometrics Journal © 2012 Royal Economic Society.
The Econometrics Journal
Volume 15, Issue 1, pages 101–124, February 2012
How to Cite
De Blander, R. and Dhaene, G. (2012), Unit root tests for panel data with AR(1) errors and small T. The Econometrics Journal, 15: 101–124. doi: 10.1111/j.1368-423X.2011.00363.x
- Issue published online: 16 FEB 2012
- Article first published online: 16 FEB 2012
- First version received: May 2007; final version accepted: November 2011
- Panel data;
- Serial correlation;
- Unit root
Summary We propose unit root tests for panel data with a small number of time periods, T, and increments that follow an AR(1) process under the null. The model is a fixed-effect panel version of the augmented Dickey–Fuller regression of order 1. Individual-specific linear trends may also be included. The test statistics are t-type statistics based on least-squares estimates from which the Nickell bias is removed. Their limiting distributions (for an increasing number of independent cross-section units, N, and fixed T) are standard normal. Our test generalizes the panel unit root test of Harris and Tzavalis, which is based on an unaugmented Dickey–Fuller regression. As an illustration, we examine whether the Law of One Price holds in the European car market since the start of stage three of the EMU in 1999. We find strong evidence of price convergence in the EMU countries.