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Panel Data Factor Methods and Tests for Cointegration (ECO-AD-PANELDATA)

ECO-AD-PANELDATA

Purpose

Ability to understand the theoretical and empirical techniques involved, assess the literature and undertake independent research in areas of interest related to this field.
Assessment will be by term paper (which may take the form of an empirical project or a literature survey or a proposal for research). Expected length of 3000 words.

Description

Panel data methods have in recent years become the focus of research in the testing for unit roots and cointegration, with the ‘panel’ referring to the combining of a time-series with a cross-section dimension where both T and N are ‘large’ in the sense required for the asymptotic theory needed for the theoretical derivations to work. The course will attempt to provide a broad overview of the methods used, starting with the early testing strategies adopted and bringing the audience up to date with the literature on this topic. A key issue to be discussed is the way in which cross-section dependence across the units of the panel is handled, within the two dominant paradigms of cross-section augmented testing (Pesaran) versus the use of principal components (Bai and Ng). Empirical illustrations are included to discuss the methods proposed.

WEEK 1: Introducing the literature – the origins of the literature

WEEK 2: Dealing with large N,T panels. Introducing the study of cross section dependence

WEEK 3: Factor models for modelling dependence

WEEK 4: Cointegration and structural breaks in large N, T panels

WEEK 5: Summing up

Reading list 

Introductory reading 
Baltagi, B. H. (2021): Econometric Analysis of Panel Data. Sixth edition. Springer. 
Banerjee, A. (1999): Panel data unit roots and cointegration: An overview. Oxford Bulletin of Economics and Statistics, 61, 607-629. (and references therein) 
Banerjee, A. and Wagner, M. (2009): Panel Methods to Test for Unit Roots and Cointegration. In T. C. Mills and K. Patterson (Eds.): Palgrave Handbook of Econometrics. Volume 2: Applied Econometrics. 
Breitung, J. and Pesaran, M. H. (2008): Unit Roots and Cointegration in Panels. In Matyas, L., and P. Sevestre (Eds.) The Econometrics of Panel Data: Fundamentals and Recent Developments in Theory and Practice, 279-322. Kluwer Academic Publishers, Boston. 
Specific reading 
Bai, J. and Ng, S. (2004): A PANIC attack on unit roots and cointegration. Econometrica 72, 1127-1177. 
Bai, J. and Ng, S. (2010): Panel unit root tests with cross-section dependence: a further investigation. Econometric Theory 26, 1088-1114. 
Banerjee, A. and Carrion-i-Silvestre, J. L. (2017): Testing for panel cointegration using 
common correlated effects estimators. Journal of Time Series Analysis 38, 610-636. 
Gengenbach, C., Urbain, J. P. and Westerlund, J. (2016): Error correction testing in 
panels with common stochastic trends. Journal of Applied Econometrics 31, 982-1004. 
Moon, H. R., and Perron,B. (2004): Testing for a Unit Root in Panels with Dynamic Factors. Journal of Econometrics, 122, 81-126. 
Pesaran, M. H. (2006): Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967-1012. 
Pesaran, M. H. (2007): A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics 22, 265-312. 
Pesaran, M. H., Shin, Y. and Smith, R. (2001): Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics 16, 289-326. 
Pesaran, M. H., Smith, L. V. and Yamagata, T. (2013): Panel unit root tests in the presence of a multifactor error structure. Journal of Econometrics 175, 94-115. 
Phillips, P. C. B. and Moon, H. R. (1999): Linear regression limit theory for nonstationary panel data. Econometrica 67, 1057-1111. 
Reese, S. and Westerlund, J. (2016): Panicca: Panic on cross-section averages. Journal of Applied Econometrics 31, 961-981. 
Westerlund, J. (2007): Unbiased estimation of cointegrated panel regressions with cross section dependence. Journal of Financial Econometrics 5, 491-522. 
Empirical reading (some examples) 
Baillie, R.T. (1989): Econometric tests of rationality and market efficiency. Econometric Reviews 8, 151-186. 
Cornell, B. (1977): Spot rates, forward rates and exchange market efficiency. Journal of Financial Econometrics 5, 55-65. 
Fu, H. and Luger, R. (2022): Multiple testing of the forward rate unbiasedness hypothesisacross currencies. Journal of Empirical Finance 68, 232-245. 
Holly, S., Pesaran, M. H. and Yamagata, T. (2010): A spatio-temporal model of house prices in the USA. Journal of Econometrics 158, 160-173. 
Zivot, E. (2000): Cointegration and forward and spot exchange rate regressions. Journal of International Money and Finance 19, 785-812.
 

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