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

Jushan Bai, Chihwa D. Kao
2005 Social Science Research Network  

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Most of the existing literature on panel data cointegration assumes crosssectional 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 continuousupdated fully modified (CUP-FM) estimator. Monte Carlo results show that the CUP-FM estimator has
more » ... small sample properties than the two-step FM (2S-FM) and OLS estimators.
doi:10.2139/ssrn.1815227 fatcat:l26fpibirjb6haqdlb43kl3tee
Citation

Jushan Bai, Chihwa D. Kao. "On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence." Social Science Research Network (2005)