A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model under misspecification

X. Zhou, M. Solberger

Research output: Working paperProfessional

221 Downloads (Pure)

Abstract

We consider an exact factor model and derive a Lagrange multiplier-type test for unit roots in the idiosyncratic components. The asymptotic distribution of the statistic is derived under the misspecification that the differenced factors are white noise. We prove that the asymptotic distribution is independent of the distribution of the factors, and that the factors are allowed to be integrated, cointegrate, or be stationary. In a simulation study, size and power is compared with some popular second generation panel unit root tests. The simulations suggest that our statistic is well-behaved in terms of size and that it is powerful and robust in comparison with existing tests.
Original languageEnglish
Place of PublicationMaastricht
PublisherMaastricht University, Graduate School of Business and Economics
DOIs
Publication statusPublished - 1 Jan 2013

Publication series

SeriesGSBE Research Memoranda
Number058

Cite this

Zhou, X., & Solberger, M. (2013). A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model under misspecification. Maastricht University, Graduate School of Business and Economics. GSBE Research Memoranda, No. 058 https://doi.org/10.26481/umagsb.2013058