Using panel data to increase the power of modified unit root tests in the presence of structural breaks

摘要

When testing for unit roots using the Dickey-Fuller test, the presence of structural breaks can cause serious size distortions to the test. Previous research has suggested two modified tests, the weighted symmetric and the recursively mean-adjusted test, that has robust size properties even in the presence of a structural break. However, recent findings have shown that the power of the two modified unit root tests is severely decreased in the presence of structural breaks. In this paper, we suggest that time series for several cross-sections can be simultaneously considered to increase the power of the modified unit root tests. We suggest two panel data tests that are easy to calculate and show that these tests have an asymptotically normal distribution. Using Monte Carlo simulations, we also show that the use of the suggested panel data tests contribute to very large increases in the power of the modified tests, although structural breaks are present under the null hypothesis. (c) 2005 Elsevier Inc. All rights reserved.