Recent developments within the panel unit-root literature have illustrated how the exact factor model serves as a parsimonious framework and allows for consistent maximum likelihood inference even when it is misspecified contra the more general approximate factor model. In this paper we consider an exact factor model with AR(1) dynamics and propose LM-type tests for idiosyncratic and common unit roots. We derive the asymptotic distributions and carry out simulations to investigate size and power of the tests in finite samples, as well as compare the performance with some existing tests.
|Place of Publication||Maastricht|
|Publisher||Maastricht University, Graduate School of Business and Economics|
|Publication status||Published - 1 Jan 2013|
|Series||GSBE Research Memoranda|
Solberger, M., & Zhou, X. (2013). LM-type tests for idiosyncratic and common unit roots in the exact factor model with AR(1) dynamics. Maastricht University, Graduate School of Business and Economics. GSBE Research Memoranda, No. 059 https://doi.org/10.26481/umagsb.2013059