Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-1
Panel LM Unit Root Tests with Trend Shifts
March 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2010-1
Panel LM Unit Root Tests with Trend Shifts
March 2010
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Panel LM Unit Root Tests with Trend Shifts
Kyung So Im, Junsoo Lee, and Margie Tieslau*
March 6, 2010
Abstract
This paper proposes a new Lagrange multiplier (LM) based unit root test for panel data allowing
for heterogeneous structural breaks in both the intercept and slope of each cross-section unit in
the panel. We note that panel unit root tests allowing for breaks in the slope will critically depend
on the nuisance parameters indicating the size and location of break s. Any panel tests that ignore
this dependency on the nuisance parameter will be subject to serious size distortions. To address
this problem, our test employs a method that renders the asymptotic distribution of the panel tests
invariant to nuisance parameters. We derive the asymptotic pr operties of our test and also
examine its finite-sample properties. In addition, our test easily can be modified to correct for the
presence of cross-correlations in the innovations of the panel. We illustrate this by applying the
cross-sectionally augmented ADF (CADF) procedure of Pesaran (2007) to our test statistic.
JEL Classification: C12, C15, C22
Keywords: Panel Unit Root Tests, LM Test, Structural Breaks, Trend Breaks
_______________
* Kyung So Im, Senior Economist, Division of Insurance and Research, Federal Deposit
Insurance Corporation (tel: 202-898-6716; e-mail: kim@fdic.gov); Junsoo Lee, Professor,
Department of Economics, Finance & Legal Studi es, University of Alabama, Tuscaloosa, AL
35487 (tel: 205-348-8978; e-mail: jlee@cba.ua.edu); Margie Tieslau (c orresponding author),
Associate Professor, Department of Economics, University of North Texas, 1155 Union Circle
311457, Denton, TX 76203 (tel: 940-565-2573; fax: 940-565-4426; e-mail: tieslau@unt.edu)
Kyung So Im, Junsoo Lee, and Margie Tieslau*
March 6, 2010
Abstract
This paper proposes a new Lagrange multiplier (LM) based unit root test for panel data allowing
for heterogeneous structural breaks in both the intercept and slope of each cross-section unit in
the panel. We note that panel unit root tests allowing for breaks in the slope will critically depend
on the nuisance parameters indicating the size and location of break s. Any panel tests that ignore
this dependency on the nuisance parameter will be subject to serious size distortions. To address
this problem, our test employs a method that renders the asymptotic distribution of the panel tests
invariant to nuisance parameters. We derive the asymptotic pr operties of our test and also
examine its finite-sample properties. In addition, our test easily can be modified to correct for the
presence of cross-correlations in the innovations of the panel. We illustrate this by applying the
cross-sectionally augmented ADF (CADF) procedure of Pesaran (2007) to our test statistic.
JEL Classification: C12, C15, C22
Keywords: Panel Unit Root Tests, LM Test, Structural Breaks, Trend Breaks
_______________
* Kyung So Im, Senior Economist, Division of Insurance and Research, Federal Deposit
Insurance Corporation (tel: 202-898-6716; e-mail: kim@fdic.gov); Junsoo Lee, Professor,
Department of Economics, Finance & Legal Studi es, University of Alabama, Tuscaloosa, AL
35487 (tel: 205-348-8978; e-mail: jlee@cba.ua.edu); Margie Tieslau (c orresponding author),
Associate Professor, Department of Economics, University of North Texas, 1155 Union Circle
311457, Denton, TX 76203 (tel: 940-565-2573; fax: 940-565-4426; e-mail: tieslau@unt.edu)