cross-sectional dependence, common shocks, nonstationary panel
This paper develops a novel asymptotic theory for panel models with common shocks. We assume that contemporaneous correlation can be generated by both the presence of common regressors among units and weak spatial dependence among the error terms. Several characteristics of the panel are considered: cross sectional and time series dimensions can either be fixed or large; factors can either be observable or unobservable; the factor model can describe either cointegration relationship or a spurious regression, and we also consider the stationary case. We derive the rate of convergence and the distribution limits for the ordinary least squares (OLS) estimates of the model parameters under all the aforementioned cases.
Kao, Chihwa; Trapani, Lorenzo; and Urga, Giovanni, "The Asymptotics for Panel Models with Common Shocks" (2006). Center for Policy Research. Paper 87.
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