Testing for exogeneity in cointegrated panels

Trapani, Lorenzo

Abstract

This paper proposes a test for the null that, in a cointegrated panel, the long-run correlation between the regressors and the error term is different from zero. As is well known, in such case the OLS estimator is T-consistent, whereas it is math formula-consistent when there is no endogeneity. Other estimators can be employed, such as the FM-OLS, that are math formula-consistent irrespective of whether exogeneity is present or not. Using the difference between the former and the latter estimator, we construct a test statistic which diverges at a rate math formula under the null of endogeneity, whilst it is bounded under the alternative of exogeneity, and employ a randomization approach to carry out the test. Monte Carlo evidence shows that the test has the correct size and good power.

Citation

Trapani, L. (2015). Testing for exogeneity in cointegrated panels. Oxford Bulletin of Economics and Statistics, 77(4), https://doi.org/10.1111/obes.12072

• Journal Article Type: Article
• Acceptance Date: May 19, 2014
• Online Publication Date: Jul 17, 2014
• Publication Date: Aug 1, 2015
• Deposit Date: Jan 22, 2018
• Publicly Available Date: Jan 22, 2018
• Journal: Oxford Bulletin of Economics and Statistics
• Print ISSN: 0305-9049
• Electronic ISSN: 1468-0084
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 77
• Issue: 4
• DOI: https://doi.org/10.1111/obes.12072
• Public URL: https://nottingham-repository.worktribe.com/output/982934
• Publisher URL: http://onlinelibrary.wiley.com/doi/10.1111/obes.12072/full
• Additional Information: This is the peer reviewed version of the following article: Trapani, L. (2015), Testing for Exogeneity in Cointegrated Panels. Oxf Bull Econ Stat, 77: 475–494, which has been published in final form at http://dx.doi.org/10.1111/obes.12072. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
• Contract Date: Jan 22, 2018