Local asymptotic power of the Im-Pesaran-Shin panel unit root test and the impact of initial observations

David Harris, David I Harvey, Stephen Leybourne, Nikolaos Sakkas

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15 Citations (Scopus)
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Abstract

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.
Original languageEnglish
Pages (from-to)311-324
Number of pages13
JournalEconometric Theory
Volume26
Issue number1
Early online date12 Aug 2009
DOIs
Publication statusPublished - Feb 2010

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