On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence

Author(s)/Creator(s)

Jushan Bai, New York University, Department of Economics ; Tsinghua University, Department of EconomicsFollow
Chihwa Kao, Syracuse University, Maxwell School, Center for Policy Research.Follow

Description/Abstract

Most of the existing literature on panel data cointegration assumes cross-sectional independence, an assumption that is difficult to satisfy. This paper studies panel cointegration under cross-sectional dependence, which is characterized by a factor structure. We derive the limiting distribution of a fully modified estimator for the panel cointegrating coefficients. We also propose a continuous-updated fully modified (CUP-FM) estimator). Monte Carlo results show that the CUP-FM estimator has better small sample properties than the two-step FM (2S-FM) and OLS estimators.

Document Type

Working Paper

Date

2005

Keywords

panel data cointegration, cross-sectional independence, cross-sectional dependence, continuous updated fully modified (CUP-FM) estimator, Monte Carlo results, two-step FM (2S-FM) estimator, OLS estimator

Language

English

Series

Working Papers Series

Disciplines

Econometrics

Additional Information

Harvest from RePEc at http://repec.org

Recommended Citation

Bai, Jushan and Kao, Chihwa, "On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence" (2005). Center for Policy Research. 89.
https://surface.syr.edu/cpr/89

Source

Metadata from RePEc