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Nonstationary-volatility robust panel unit root tests and the great moderation

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Nonstationary-volatility robust panel unit root tests and the great moderation

Content Provider	Springer Nature Link
Author	Hanck, Christoph Czudaj, Robert
Copyright Year	2014
Abstract	This paper argues that typical applications of panel unit root tests should take possible nonstationarity in the volatility process of the innovations of the panel time series into account. Nonstationary volatility arises, for instance, when there are structural breaks in the innovation variances. A prominent example is the reduction in GDP growth variances enjoyed by many industrialized countries, known as the ‘Great moderation.’ It also proposes a new testing approach for panel unit roots that is, unlike many existing tests, robust to such volatility processes. The panel test is based on Simes’ (Biometrika 73:751–754, 1986) classical multiple test, which combines evidence from time series unit root tests of the series in the panel. As time series tests, we employ the recent proposals of Cavaliere and Taylor (J Time Ser Anal 29:300–330, 2008b). The panel test is robust to general patterns of cross-sectional dependence and yet is straightforward to implement, only requiring valid $$p$$ values of time series tests, and no resampling. Simulations show other panel unit root tests to suffer from sometimes severe size distortions under nonstationary volatility and that this can be remedied using the test proposed here. We use the methods to test for unit roots in OECD panels of gross domestic products and inflation rates, yielding inference robust to the ‘Great moderation’. We find little evidence of trend stationarity and mixed evidence regarding inflation stationarity.
Starting Page	161
Ending Page	187
Page Count	27
File Format	PDF
ISSN	18638171
Journal	AStA Advances in Statistical Analysis
Volume Number	99
Issue Number	2
e-ISSN	1863818X
Language	English
Publisher	Springer Berlin Heidelberg
Publisher Date	2014-08-15
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Panel unit root test Nonstationary volatility Cross-sectional dependence GDP stationarity Inflation stationarity Statistics Statistics for Business/Economics/Mathematical Finance/Insurance Probability Theory and Stochastic Processes Econometrics
Content Type	Text
Resource Type	Article
Subject	Applied Mathematics Statistics and Probability Social Sciences Economics and Econometrics Analysis Modeling and Simulation

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