Panels with Nonstationary Multifactor Error Structures

@inproceedings{Kapetanios2006PanelsWN,
  title={Panels with Nonstationary Multifactor Error Structures},
  author={George Kapetanios and M. Hashem Pesaran and Takashi Yamagata},
  year={2006}
}
The presence of cross-sectionally correlated error terms invalidates much inferential theory of panel data models. Recently, work by Pesaran (2006) has suggested a method which makes use of crosssectional averages to provide valid inference in the case of stationary panel regressions with amultifactor error structure. This paper extends this work and examines the important case where the unobservable common factors follow unit root processes. The extension to I(1) processes is remarkable on two… CONTINUE READING
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