TESTING FOR STATIONARITY WITH A BREAK IN PANELS WHERE THE TIME DIMENSION IS FINITE

Authors


Kaddour Hadri, Queen’s University Belfast, Riddel Hall, 185 Stranmillis Road, Belfast BT9 5EE, Northern Ireland. Tel: +44(0) 28 9097 5618; Fax: +44(0) 28 9097 4201; Email: k.hadri@qub.ac.uk. The authors would like to thank the Editor and two anonymous referees for their valuable comments and suggestions. Any remaining shortcomings are ours. Kaddour Hadri would like to acknowledge the financial support of the British Academy (grant R1254MAI) under the Japan–Britain Cooperative Programme.

ABSTRACT

In this paper, we consider the case of finite time dimension in the panel stationarity tests with structural breaks. By fixing T, the finite sample properties of the tests for both micro (T small and N large) and macro (both T and N large) panel data are generally greatly improved. More importantly, the derivation of the tests for finite T and inline image, as opposed to joint asymptotic where N and inline image simultaneously, avoids the imposition of the rate condition inline image making the test valid for any (T, N) blend. Four models corresponding to the usual combination of breaks are considered. The asymptotic distributions of the test are derived under the null hypothesis and are shown to be normally distributed. Their moments for T fixed are derived analytically employing Ghazal’s corollary 1. The case with unknown breaks is also considered. The proposed tests have generally empirical sizes that are very close to the nominal size. The Monte Carlo simulations show that the power of the test statistics increases substantially with N and  T.

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