A Novel Approach for Testing Fractional Cointegration in Panel Data Models with Fixed Effects

Author:

Olaniran Saidat Fehintola1ORCID,Olaniran Oyebayo Ridwan2ORCID,Allohibi Jeza3ORCID,Alharbi Abdulmajeed Atiah3ORCID

Affiliation:

1. Department of Statistics and Mathematical Sciences, Faculty of Pure and Applied Sciences, Kwara State University, Malete 1530, Nigeria

2. Department of Statistics, Faculty of Physical Sciences, University of Ilorin, Ilorin 1515, Nigeria

3. Department of Mathematics, Faculty of Science, Taibah University, Al-Madinah Al-Munawara 42353, Saudi Arabia

Abstract

Fractional cointegration in time series data has been explored by several authors, but panel data applications have been largely neglected. A previous study of ours discovered that the Chen and Hurvich fractional cointegration test for time series was fairly robust to a moderate degree of heterogeneity across sections of the six tests considered. Therefore, this paper advances a customized version of the Chen and Hurvich methodology to detect cointegrating connections in panels with unobserved fixed effects. Specifically, we develop a test statistic that accommodates variation in the long-term cointegrating vectors and fractional cointegration parameters across observational units. The behavior of our proposed test is examined through extensive Monte Carlo experiments under various data-generating processes and circumstances. The findings reveal that our modified test performs quite well comparatively and can successfully identify fractional cointegrating relationships in panels, even in the presence of idiosyncratic disturbances unique to each cross-sectional unit. Furthermore, the proposed modified test procedure established the presence of long-run equilibrium between the exchange rate and labor wage of 36 countries’ agricultural markets.

Publisher

MDPI AG

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