Department of Economics and Business Economics

Persistence Heterogeneity Testing in Panels with Interactive Fixed Effects

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We consider large N,T panel data models with fixed effects, a common factor allowing for cross-section dependence, and persistent data and shocks, which are assumed fractionally integrated. In a basic setup, the main interest is on the fractional parameter of the idiosyncratic component, which is estimated in first differences after factor removal by projection on the cross-section average. The pooled conditional-sum-of-squares estimate is NT consistent but the normal asymptotic distribution might not be centred, requiring the time series dimension to grow faster than the cross-section size for correction. We develop tests of homogeneity of dynamics, including the degree of integration, that have no trivial power under local departures from the null hypothesis of a non-negligible fraction of cross-section units. A simulation study shows that our estimates and tests have good performance even in moderately small panels.

Original languageEnglish
JournalJournal of Time Series Analysis
Pages (from-to)573-589
Number of pages17
Publication statusPublished - Jul 2019

    Research areas

  • factor models, Fractional integration, homogeneity test, long memory, panel data

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