The Refinement of a Common Correlated Effect Estimator in Panel Unit Root Testing: An Extensive Simulation Study

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Omay T., AKDİ Y., EMİRMAHMUTOĞLU F., Eryılmaz M.

Mathematics, cilt.12, sa.22, 2024 (SCI-Expanded) identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 12 Sayı: 22
  • Basım Tarihi: 2024
  • Doi Numarası: 10.3390/math12223458
  • Dergi Adı: Mathematics
  • Derginin Tarandığı İndeksler: Science Citation Index Expanded (SCI-EXPANDED), Scopus, Academic Search Premier, Aerospace Database, Communication Abstracts, Metadex, zbMATH, Directory of Open Access Journals, Civil Engineering Abstracts
  • Anahtar Kelimeler: CD test, common correlated effect estimator, cross-sectional dependency, panel unit root test
  • Ankara Üniversitesi Adresli: Evet

Özet

The Common Correlated Effect (CCE) estimator is widely used in panel data models to address cross-sectional dependence, particularly in nonstationary panels. However, existing estimators have limitations, especially in small-sample settings. This study refines the CCE estimator by introducing new proxy variables and testing them through a comprehensive set of simulations. The proposed method is simple yet effective, aiming to improve the handling of cross-sectional dependence. Simulation results show that the refined estimator eliminates cross-sectional dependence more effectively than the original CCE, with improved power properties under both weak- and strong-dependence scenarios. The refined estimator performs particularly well in small sample sizes. These findings offer a more robust framework for panel unit root testing, enhancing the reliability of CCE estimators and contributing to further developments in addressing cross-sectional dependence in panel data models.