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{title:Multivariate Augmented Dickey-Fuller panel unit root test}
{p 8 14}{cmd:madfuller} {it:varname}
[{cmd:if} {it:exp}] [{cmd:in} {it:range}] {cmd:,lags({it:numlist})}
{p}{cmd:madfuller} is for use with panel data. You must {cmd:tsset} your
data before using {cmd:madfuller}, using the panel form of {cmd:tsset}; see help {help tsset}.
{p} {it:varname} may contain time-series operators; see help {help varlist}.
{title:Description}
{p}{cmd:madfuller} performs the multivariate augmented Dickey-Fuller (MADF) panel unit
root test (Sarno and Taylor, 1998; Taylor and Sarno, 1998) on a variable
that contains both cross-section and time-series components. The MADF test is
a generalization of the test developed by Abuaf and Jorion (1990) in which
a single autoregressive parameter is estimated over the panel. In contrast, Sarno and Taylor allow for higher order
serial correlation in the series and allow the sum of autoregressive
coefficients to vary across panel units under the alternative hypothesis. The authors
claim that the MADF test is "very much more powerful than the univariate
ADF test." (Taylor and Sarno, p. 298)
The test applies Zellner's seemingly unrelated equation estimator {help sureg}
to {cmd:N} equations, defined for the {cmd:N} units of the panel. Each equation is
specified as a {cmd:k}-th order autoregression. The test involves testing the
hypothesis, for each equation, that the sum of the coefficients of the
autoregressive polynomial is unity. The null hypothesis consists of the
joint test that this condition is satisfied over the {cmd:N} equations. Under
the null hypothesis, all of the series under consideration are realizations
of I(1), or nonstationary, stochastic processes. The distribution of the
test statistic must be approximated because of the "theoretically infinite
variance of the processes generating the ... series under the null
hypothesis." Taylor and Sarno (1998, p. 299) provide response surface
estimates of the 5% critical values, derived from Monte Carlo simulation.
The response surface was estimated over sample sizes ranging from 25 to
500 observations per cross-sectional unit.
The test's null hypothesis should be carefully considered. It will be
violated if even one of the series in the panel is stationary. A rejection
should thus not be taken to indicate that each of the series is stationary.
Johansen's likelihood ratio test (Sarno and Taylor, 1998) applies the opposite
hypothesis: that at least one of the series in the panel is a nonstationary
process.
{p} The test may be compared with Levin and Lin's (1993) panel unit root test
{help levinlin} which imposes a single autoregressive parameter over all units in the panel
but utilizes a variant of {help xtreg, fe} for estimation. The Levin-Lin test
may thus be employed for small-T, large-N panels. However, the caveats mentioned above apply to this test.
{p_end}
{title:Options}
{p 0 4}{cmd:lags}, which must be provided,
specifies the lag orders to be used in augmenting the
Dickey-Fuller regression. If multiple lag orders are given, the test
is performed for each lag order.
{title:Examples}
{p 8 12}{inp:.} {stata "use http://fmwww.bc.edu/ec-p/data/hayashi/sheston91.dta,clear":use http://fmwww.bc.edu/ec-p/data/hayashi/sheston91.dta,clear}
{p 8 12}{inp:.} {stata "madfuller rgdppc if country<11, lags(2(2)8)":madfuller rgdppc if country<11, lags(2(2)8)}
{p 8 12}{inp:.} {stata "madfuller D.rgdppc if country<11, lags(4)":madfuller D.rgdppc if country<11, lags(4)}
{title:References}
Abuaf, N. and P. Jorion. Purchasing power parity in the long run. Journal
of Finance 45, 1990, 157-174.
Levin, Andrew and Lin, Chien-Fu. Unit Root Tests in Panel Data:
New Results", University of California Discussion Paper No. 93-56, 1993.
Sarno, Lucio and Mark P. Taylor. Real exchange rates under the current
float: unequivocal evidence of mean reversion. Economics Letters, 60,
1998, 131-137.
Taylor, Mark P. and Lucio Sarno. The behavior of real exchange rates during
the post-Bretton Woods period. Journal of International Economics, 46,
1998, 281-312.
{title:Acknowledgements}
I thank Falko Juessen for suggesting improvements to the help file.
{title:Author}
Christopher F Baum, Boston College, USA, baum@bc.edu
{title:Also see}
{p 0 19}Manual: [R] dfuller
{p 0 19}On-line: help for {help dfuller}, {help time}, {help tsset},
{help sureg}, {help dfgls} (if installed), {help levinlin} (if installed)