Synergy between an Improved Covariate Unit Root Test and Cross-sectionally Dependent Panel Data Unit Root Tests

This paper proposes the use of an improved covariate unit root test which exploits the cross‐sectional dependence information when the panel data null hypothesis of a unit root is rejected. More explicitly, to increase the power of the test, we suggest the utilization of more than one covariate and...

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Bibliographic Details
Published in:The Manchester school 2015-12, Vol.83 (6), p.676-700
Main Authors: Hadri, Kaddour, Kurozumi, Eiji, Yamazaki, Daisuke
Format: Article
Language:English
Subjects:
Commodity prices
Decision analysis
Economic models
Hypotheses
Studies
Test methods
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Summary:This paper proposes the use of an improved covariate unit root test which exploits the cross‐sectional dependence information when the panel data null hypothesis of a unit root is rejected. More explicitly, to increase the power of the test, we suggest the utilization of more than one covariate and offer several ways to select the ‘best’ covariates from the set of potential covariates represented by the individuals in the panel. Employing our methods, we investigate the Prebish‐Singer hypothesis for nine commodity prices. Our results show that this hypothesis holds for all but the price of petroleum.
ISSN:1463-6786
1467-9957
DOI:10.1111/manc.12080