Panel Cointegration Tests with Structural Breaks.

xtbreakcoint

Panel cointegration tests allowing for structural breaks and cross-section dependence, implementing the methodology of Banerjee and Carrion-i-Silvestre (2015).

Installation

You can install the development version from GitHub:

# install.packages("devtools")

Overview

The xtbreakcoint package tests for panel cointegration when:

• Structural breaks may be present in the cointegrating relationship
• Cross-section dependence exists through common factors

The methodology follows four steps:

1. Iterative Factor-Break Estimation: Jointly estimates common factors and individual break dates
2. Individual ADF Tests: Applies ADF tests to defactored residuals
3. Panel Test Statistic: Combines individual statistics into a standardized panel statistic
4. MQ Test: Tests whether common factors are I(1) stochastic trends

Example

library(xtbreakcoint)

# Generate example panel data
set.seed(42)
N <- 10   # panels
T <- 50   # time periods

panel_data <- data.frame(
  id = rep(1:N, each = T),
  time = rep(1:T, N),
  y = NA,
  x = NA
)

# Create cointegrated data with a structural break at t=25
for (i in 1:N) {
  idx <- panel_data$id == i
  x <- cumsum(rnorm(T))
  u <- rnorm(T, sd = 0.5)
  beta <- ifelse(1:T <= 25, 1, 1.5)  # Break in slope
  y <- 1 + beta * x + u
  panel_data$x[idx] <- x
  panel_data$y[idx] <- y
}

# Test for cointegration
result <- xtbreakcoint(y ~ x, data = panel_data, id = "id", time = "time")
print(result)

Model Specifications

References

• Banerjee, A., & Carrion-i-Silvestre, J. L. (2015). Cointegration in panel data with structural breaks and cross-section dependence. Journal of Applied Econometrics, 30(1), 1-22. doi:10.1002/jae.2348

• Bai, J., & Ng, S. (2004). A PANIC attack on unit roots and cointegration. Econometrica, 72(4), 1127-1177. doi:10.1111/j.1468-0262.2004.00528.x

• Bai, J., & Ng, S. (2002). Determining the number of factors in approximate factor models. Econometrica, 70(1), 191-221. doi:10.1111/1468-0262.00273

Author

Based on original GAUSS code by A. Banerjee and J.L. Carrion-i-Silvestre.

License

GPL (>= 3)