Panicca: Panic on Cross‐Section Averages

The cross-section average (CA) augmentation approach of Pesaran (A simple panel unit root test in presence of cross-section dependence. Journal of Applied Econometrics 2007; 22: 265-312) and Pesaran et al. (Panel unit root test in the presence of a multifactor error structure. Journal of Econometrics 2013; 175: 94-115), and the principal components-based panel analysis of non-stationarity in idiosyncratic and common components (PANIC) of Bai and Ng (A PANIC attack on unit roots and cointegration. Econometrica 2004; 72: 1127-1177; Panel unit root tests with cross-section dependence: a further investigation. Econometric Theory 2010; 26: 1088-1114) are among the most popular second-generation' approaches for cross-section correlated panels. One feature of these approaches is that they have different strengths and weaknesses. The purpose of the current paper is to develop PANICCA, a combined approach that exploits the strengths of both CA and PANIC. Copyright (c) 2015 John Wiley & Sons, Ltd.