The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study

Abstract

This paper presents results on the size and power of first generation panel unit root and stationarity tests obtained from a large scale simulation study. The tests developed in the following papers are included: Levin et al. (2002 Levin , A. , Lin , C. F. , Chu , C.-S. J. ( 2002 ). Unit root tests in panel data: asymptotic and finite sample properties . Journal of Econometrics 108 : 1 – 22 . [CROSSREF] [CSA] [Crossref], [Web of Science ®] , [Google Scholar]), Harris and Tzavalis (1999 Harris , R. D. F. , Tzavalis , E. ( 1999 ). Inference for unit roots in dynamic panels where the time dimension is fixed . Journal of Econometrics 90 : 1 – 44 . [CROSSREF] [CSA] [Google Scholar]), Breitung (2000 Breitung , J. ( 2000 ). The local power of some unit root tests for panel data . In: Baltagi , B. H. , ed. Nonstationary Panels, Panel Cointegration, and Dynamic Panels . Amsterdam: Elsevier , pp. 161 – 177 .[Crossref] , [Google Scholar]), Im et al. (1997 Im , K. S. , Pesaran , M. H. , Shin , Y. ( 1997 ). Testing for Unit Roots in Heterogeneous Panels . Mimeo : Cambridge University . [Google Scholar] 2003 Im , K. S. , Pesaran , M. H. , Shin , Y. ( 2003 ). Testing for unit roots in heterogeneous panels . Journal of Econometrics 115 : 53 – 74 . [CROSSREF] [CSA] [Crossref], [Web of Science ®] , [Google Scholar]), Maddala and Wu (1999 Maddala , G. S. , Wu , S. ( 1999 ). A comparative study of unit root rests with panel data and a simple new test . Oxford Bulletin of Economics and Statistics 61 : 631 – 652 . [CSA] [Crossref], [Web of Science ®] , [Google Scholar]), Hadri (2000 Hadri , K. ( 2000 ). Testing for stationarity in heterogeneous panel data . Econometrics Journal 3 : 148 – 161 . [CROSSREF] [CSA] [Crossref] , [Google Scholar]), and Hadri and Larsson (2005 Hadri , K. , Larsson , R. ( 2005 ). Testing for stationarity in heterogeneous panel data where the time dimension is fixed . Econometrics Journal 8 : 55 – 69 . [CROSSREF] [CSA] [Crossref], [Web of Science ®] , [Google Scholar]). Our simulation set-up is designed to address inter alia the following issues. First, we assess the performance as a function of the time and the cross-section dimensions. Second, we analyze the impact of serial correlation introduced by positive MA roots, known to have detrimental impact on time series unit root tests, on the performance. Third, we investigate the power of the panel unit root tests (and the size of the stationarity tests) for a variety of first order autoregressive coefficients. Fourth, we consider both of the two usual specifications of deterministic variables in the unit root literature.