TY - JOUR
T1 - Local asymptotic power of the Im-Pesaran-Shin panel unit root test and the impact of initial observations
AU - Harris, David
AU - Harvey, David I
AU - Leybourne, Stephen
AU - Sakkas, Nikolaos
PY - 2010/2
Y1 - 2010/2
N2 - In this note we derive the local asymptotic power function of the standardized averaged Dickey–Fuller panel unit root statistic of Im, Pesaran, and Shin (2003, Journal of Econometrics, 115, 53–74), allowing for heterogeneous deterministic intercept terms. We consider the situation where the deviation of the initial observation from the underlying intercept term in each individual time series may not be asymptotically negligible. We find that power decreases monotonically as the magnitude of the initial conditions increases, in direct contrast to what is usually observed in the univariate case. Finite-sample simulations confirm the relevance of this result for practical applications, demonstrating that the power of the test can be very low for values of T and N typically encountered in practice.
AB - In this note we derive the local asymptotic power function of the standardized averaged Dickey–Fuller panel unit root statistic of Im, Pesaran, and Shin (2003, Journal of Econometrics, 115, 53–74), allowing for heterogeneous deterministic intercept terms. We consider the situation where the deviation of the initial observation from the underlying intercept term in each individual time series may not be asymptotically negligible. We find that power decreases monotonically as the magnitude of the initial conditions increases, in direct contrast to what is usually observed in the univariate case. Finite-sample simulations confirm the relevance of this result for practical applications, demonstrating that the power of the test can be very low for values of T and N typically encountered in practice.
UR - http://www.scopus.com/inward/record.url?scp=77951123269&partnerID=8YFLogxK
UR - http://dx.doi.org/10.1017/S0266466609090768
U2 - 10.1017/S0266466609090768
DO - 10.1017/S0266466609090768
M3 - Article
VL - 26
SP - 311
EP - 324
JO - Econometric Theory
JF - Econometric Theory
SN - 0266-4666
IS - 1
ER -