Likelihood-Based Panel Unit Root Tests for Factor Models

Sammanfattning: The thesis consists of four papers that address likelihood-based unit root tests for panel data with cross-sectional dependence arising from common factors.In the first three papers, we derive Lagrange multiplier (LM)-type tests for common and idiosyncratic unit roots in the exact factor models based on the likelihood function of the differenced data. Also derived are the asymptotic distributions of these test statistics. The finite sample properties of these tests are compared by simulation with other commonly used unit root tests. The results show that our LM-type tests have better size and local power properties.In the fourth paper, we estimate the spaces spanned by the common factors and the spaces spanned by the idiosyncratic components of the static factor model by using the quasi-maximum likelihood (ML) method and compare it with the widely used method of principal components (PC). Next, by simulation, we compare the size and power properties of established tests for idiosyncratic unit roots, using both the ML and PC methods. Simulation results show that the idiosyncratic unit root tests based on the likelihood-based residuals generally have better size and higher size-adjusted power, especially when the cross-sectional dimension is small and the time series dimension is large.