Testing for a unit root in panels with dynamic factors

Hyungsik Roger Moon, Benoit Perron

Research output: Contribution to journalArticle

440 Citations (Scopus)


This paper studies testing for a unit root for large n and T panels in which the cross-sectional units are correlated. To model this cross-sectional correlation, we assume that the data are generated by an unknown number of unobservable common factors. We propose unit root tests in this environment and derive their (Gaussian) asymptotic distribution under the null hypothesis of a unit root and local alternatives. We show that these tests have significant asymptotic power when the model has no incidental trends. However, when there are incidental trends in the model and it is necessary to remove heterogeneous deterministic components, we show that these tests have no power against the same local alternatives. Through Monte Carlo simulations, we provide evidence on the finite sample properties of these new tests.

Original languageEnglish
Pages (from-to)81-126
Number of pages46
JournalJournal of Econometrics
Issue number1
Publication statusPublished - 2004 Sep

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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