Nonstationary
panel
data
methods

applied
on
a
winter
tourism
demand
model




Franz
Eigner

August
2009



University
of
Vienna

UK
Advanced
Econometrics

with
Prof.
Costantini






Table
of
contents




1.
 Introduction.........................................................................................................................................................................1


2.
 Winter
tourism
demand
model...................................................................................................................................1


3.
 Panel
cointegration
tests
and
estimations .............................................................................................................2


3.1.
 Preliminary
considerations..................................................................................................................................2


3.2.
 Panel
unit
root
tests ................................................................................................................................................2


3.3.
 Cointegration
tests...................................................................................................................................................3


3.4.
 Estimation
table ........................................................................................................................................................4


4.
 Concluding
remarks.........................................................................................................................................................4


5.
 References............................................................................................................................................................................5







1. Introduction

In
this
report,
methods
for
nonstationary
panel
data
are
applied
on
a
winter
tourism
demand
model
for
Austrian
ski

destinations.
 Assuming
 cross‐section
 independence,
 cointegrating
 relationships
 are
 employed
 and
 estimated
 by
 OLS,

fully
 modified
 OLS
 (FM‐OLS)
 and
 dynamic
 OLS
 (DOLS).
 Panel
 cointegration
 analyses
 are
 made
 with
 the
 statistical

software
GAUSS
(Aptech
Systems,
2001),
using
the
packages
Coint
2.0
by
Ouliaris
and
Phillips,
NPT
1.3
(Kao/Chiang,

2002)
and
CNPT
by
Hlouskova
and
Wagner.



2. Winter
tourism
demand
model

The
winter
tourism
demand
model
is
applied
for
N=20
ski
destinations
in
Austria
for
the
period
1973‐2006
(T=34).
 1

Winter
 tourism
 demand
 is
 measured
 by
 the
 number
 of
 overnight
 stays
 (NIGHTS),
 which
 is
 assumed
 to
 depend
 on

relative
purchasing
power
(PP)
and
income
(GDP)
of
the
tourist’
countries
and
on
the
climate
variable
snow
(SNOW),

measuring
the
number
of
days
of
snow
cover.
Thus,
the
tourism
demand
model
follows
a
typical
neoclassical
demand

function,
using
prices
and
income
variables,
together
with
a
climate
variable.
NIGHTS,
GDP
and
PP
enter
the
equation

with
their
natural
logarithm.
Due
to
the
log‐log
specification,
coefficients
of
GDP
and
PP
can
be
interpreted
as
income

elasticity
and
price
elasticity
respectively.
Panel
time
series
are
plotted
in
Figure
1
using
STATA
(StataCorp,
2007).



Figure
1:
Panel‐data
line
plots
for
panel
time
series.





























































1
The
 original
 dataset
 is
 described
 in
 Toeglhofer
 and
 Prettenthaler
 (2009).
 It
 consists
 of
 a
 cross‐section
 panel
 with
 185
 ski

destinations
 for
 the
 period
 1973‐2006.
 The
 original
 dataset
 could
 not
 pass
 nonstationarity
 tests
 for
 panels.
 In
 order
 to
 find

nonstationarity
for
all
time
series
in
the
panel
variables,
the
dataset
was
reduced
to
the
20
largest
ski
destinations
in
Austria.
Smaller

dataset
 of
 5,
 6
 or
 10
 destinations
 were
 also
 considered.
 They
 fulfilled
 nonstationarity
 assumptions,
 but
 no
 cointegrating

relationships
could
be
detected.




 1




3. Panel
cointegration
tests
and
estimations


3.1. Preliminary
considerations

Regressions
 based
 on
 nonstationary
 time
 series
 typically
 suffer
 i.a.
 from
 potential
 spurious
 regression
 problems.

Instead
of
differencing
the
data
set
to
make
them
stationary,
hence
losing
long‐term
information
of
the
data,
one
could

improve
estimation
results
by
making
use
of
cointegration
relationships,
for
the
case
they
exist.



Three
estimators
for
nonstationary
panel
regressions
are
applied
in
this
study.
These
are
OLS,
fully
modified
OLS
(FM‐
OLS)
and
dynamic
OLS
(DOLS).
Whereas
OLS
estimates
are
generally
biased
due
to
endogeneity
in
variables,
FM‐OLS

accounts
for
both
serial
correlation
and
endogeneity
in
the
regressors
that
results
from
the
existence
of
a
cointegrating

relationship.
 It
 „corrects
 the
 dependent
 variable
 using
 the
 long‐run
 covariance
 matrices
 for
 the
 purpose
 of
 removing

the
nuisance
parameters
and
applies
the
usual
OLS
estimation
method
to
the
corrected
variables.“
(Kao/Chiang/Chen,

1999).
 The
 DOLS
 estimator
 also
 corrects
 for
 the
 nuisance
 parameter,
 but
 with
 including
 lead
 and
 lag
 terms.
 Despite

super
 consistency
 of
 FM‐OLS,
 DOLS
 and
 also
 for
 OLS
 estimators,
 Kao
 and
 Chiang
 (1998)
 found
 that
 a
 substantial

estimation
bias
might
remain
for
moderate
sample
sizes.
However
they
suggest
that
DOLS
estimations
should
be
most

promising
in
estimating
cointegrated
panel
regressions.



Before
univariate
unit
root
tests
are
applied,
their
weaknesses
should
be
reminded
in
advance.
Due
to
their
low
power

in
general,
they
are
not
able
to
distinguish
a
unit
root
from
a
near
unit
root
process.
Moreover
they
may
erroneously

identify
 a
 trend
 stationary
 process
 as
 a
 unit
 root,
 especially
 in
 the
 case
 where
 the
 stochastic
 portion
 of
 the
 trend

stationary
process
has
sufficient
variance.
This
problem
may
be
relevant
in
this
study
due
to
the
usage
of
GDP,
which
is

typically
considered
as
trend‐stationary.
However
one
can
increase
the
power
of
univariate
unit
root
tests
substantially

by
using
a
longer
data
span,
e.g.
annual
data
as
in
this
study.



3.2. Panel
unit
root
tests

At
first
(independent)
unit
root
tests
have
to
be
applied
on
each
panel
variable.
All
unit
root
tests
were
examined
with

two
lagged
first
difference
terms
in
the
ADF
equation,
including
a
constant
and
a
trend.
Obtained
p‐values
are
given
in

table
1.


Table
1:
Panel
unit
root
tests.


LLC IPS MW
log(NIGHTS) 1.00 0.03 0.12
SNOW 0.85 <0.01 <0.01
log(GDP) 0.60 <0.01 <0.01
log(PP) 0.50 0.32 0.73
GDP 0.99 1.00 1.00
Notes:
ADF equations include two lagged first difference terms
together with a constant and a trend.
LLC … Levin, Lin and Chu (2002)
IPS … Im, Pesaran and Shin (1997, 2003)
MW … Maddala and Wu (1999)

 2

 All
three
unit
root
tests
check
the
null
hypothesis
of
panel
time
series
integrated
of
order
one
against
the
alternative
of

stationarity.
 This
 paper
 will
 follow
 unit
 root
 tests
 with
 homogenous
 alternative
 hypothesis,
 which
 are
 LLC
 and
 MW.

Even
though
the
ones
with
heterogenous
alternative
hypothesis
like
IPS
are
more
flexible,
their
results
may
contrast

with
the
homogenous
alternative
hypothesis
in
the
panel
cointegration
test,
assuming
a
common
cointegrating
vector

for
all
destinations.


As
 can
 be
 seen
 in
 table
 1,
 the
 null
 hypothesis
 is
 not
 rejected
 for
 log(NIGHTS)
 and
 log(PP).
 The
 rejection
 of
 the
 null

hypothesis
 for
 SNOW
 may
 indicate
 that
 at
 least
 some
 of
 its
 time
 series
 are
 stationary,
 making
 SNOW
 inadequate
 for

cointegration
 analyses.
 Surprisingly,
 the
 null
 hypothesis
 of
 log(GDP)
 is
 also
 rejected
 according
 to
 MW2.
 This
 results

contradicts
with
the
graphical
analysis
in
figure
1,
which
strongly
supports
GDP
to
be
integrated
of
order
one,
therefore

consisting
of
a
unit
root.
Examining
unit
root
tests
with
the
untransformed
levels
of
GDP
(not
taking
the
logarithm),
one

actually
 obtains
 the
 result
 of
 GDP
 being
 integrated
 of
 order
 one.
 Nonetheless,
 the
 logarithm
 of
 GDP
 will
 be
 used
 in

further
analyses
due
to
interpretation
reasons.


A
disadvantage
of
these
panel
tests
is
that
they
do
not
provide
explicit
guidance
concerning
the
size
of
the
fraction
of

(non)stationary
 time
 series.
 At
 least
 the
 data
 set
 for
 this
 study
 has
 a
 moderately
 large
 time
 dimension
 over
 a
 long

(annual)
time
period,
which
should
lead
to
unit
root
tests
with
higher
power
than
for
data
sets
containing
observations

over
a
short
time
period.
However
one
should
bear
in
mind
that
independence
between
the
unit
roots
is
assumed
in

order
to
keep
analyses
simple,
although
this
assumption
may
be
implausible.



3.3. Cointegration
tests

Cointegration
tests
are
conducted
on
three
estimation
equations,
consisting
of
either
one
of
the
independent
variables

(GDP/PP)
or
both.
For
instance,
equation
(1),
using
both
independent
variables
as
regressors,
is
given
as:


log(NIGHTS) it = β1 log(GDP) it + β 2 log(PP) it + µ i + ε it 
 (1)


where
 ε it 
 denotes
 the
 white
 noise
 disturbance
 term.
 Individual
 fixed
 effects
 are
 included
 by
 µ i ,
 capturing

heterogeneity
between
the
destinations.

€
The
presence
of
cointegration
of
log(NIGHTS)
with
log(GDP),
log(PP)
or
both
is
confirmed
by
testing
for
a
unit
root
in

€ €
the
residuals
of
the
LSDV
regression
for
each
of
the
three
equations.
Two
homogenous
tests
suggested
by
Kao
(1999),

which
are
the
Dickey
Fuller
(DF)
panel
cointegration
test
and
its
augmented
version
(ADF),
are
assessed.
Obtained
p‐
values
of
the
latter
are
given
in
Table
2.



Table
2:
ADF
panel
cointegration
test
table
for
all
three
equations.


Equation number Regressors p-value

(1) log(GDP), log(PP) 0.01
(2) log(GDP) 0.03
(3) log(PP) <0.01
Notes:
ADF cointegration tests are examined with one lag


























































2
However
the
null
hypothesis
of
MW
(as
well
as
of
LLC)
is
not
rejected
when
only
one
lagged
first
difference
term
in
the
ADF


equation
is
used.



 3




With
the
null
hypothesis
of
no
cointegration,
test
results
suggest
the
presence
of
cointegration
at
a
significance
level
of

5%
for
all
equations.
Consequently
panel
regressions
can
be
estimated
accounting
for
these
cointegration
relationships.


3.4. Estimation
table

Table
3:
Estimation
table
for
log(NIGHTS)
using
OLS,
FM‐OLS
and
DOLS.

OLS FM-OLS DOLS
(1) (2) (3) (1) (2) (3) (1) (2) (3)
log(GDP) 0.39 0.39 - 0.38 0.38 - 0.31 0.34 -
(10.6) (10.3) (9.4) (9.2) (6.5) (7.1)
log(PP) 0.37 - 0.50 0.39 - 0.54 0.06 - 0.86
(5.2) (4.5) (12.6) (11.2) (1.8) (15.6)
adjusted R_squared 0.63 0.61 0.03 0.61 0.58 0.04 0.24 0.27 0.11
Notes:
N=20, T=34; estimated cointegration equation include fixed effects
t-statistics are given in parentheses
FM-OLS with averaged correction factors (Kao and Chiang, 2000)
DOLS (Mark and Sul, 2001); 2 lags and leads for all variables were chosen



Given
the
superiority
of
the
DOLS
over
the
FM‐OLS
as
suggested
by
Kao
and
Chiang,
one
obtains
an
income
elasticity
of

0.31,
and
a
price
elasticity
of
0.06.
Price
elasticity
is
therefore
inelastic
and
has
an
unexpected
positive
sign.
However

purchasing
power
probably
should
not
be
considered
as
an
important
component
in
winter
tourism
demand
in
Austria.

Not
 only
 due
 to
 statistical
 considerations,
 which
 indicate
 that
 the
 coefficient
 is
 small
 and
 only
 significant
 at
 the
 10

percent
significant
level,
but
also
due
to
economic
reasons,
concerning
the
high
amount
of
German
tourists
in
the
data,

having
 in
 common
 a
 similar
 price
 evolution
 and
 a
 fixed
 exchange
 rate
 regime.
 Though
 one
 can
 assume
 that
 the

influence
 of
 this
 variable
 will
 increase
 in
 the
 future,
 due
 to
 the
 increasing
 amount
 of
 Eastern
 European
 tourists.
 The

estimated
 inelastic
 income
 elasticity
 also
 does
 not
 correspond
 with
 the
 expectations
 of
 tourism
 demand
 as
 a
 luxury

good
and
emphasizes
the
need
for
extensions
for
the
current
model.


4. Concluding
remarks

Extensions
of
this
study
should
definitely
cope
with
cross‐section
dependence
in
the
panel
time
series,
which
is
likely
to

be
 present
 due
 to
 the
 common
 economic
 area
 for
 the
 ski
 destinations.
 Accounting
 for
 cross‐section
 dependence
 will

necessarily
 consider
 the
 possibility
 of
 cointegration
 between
 the
 panel
 variables
 within
 groups
 as
 well
 as
 across

groups,
due
to
unobserved
I(1)
common
factors,
affecting
some
or
all
the
variables
in
the
panel.


One
 could
 further
 follow
 Phillips
 (1993),
 who
 provides
 a
 general
 framework
 which
 “makes
 it
 possible
 to
 study
 the

asymptotic
behaviour
of
FM‐OLS
in
models
with
full
rank
I(1)
regressors,
models
with
I(1)
and
I(0)
regressors,
models

with
unit
roots,
and
models
with
only
stationary
regressors.”
Such
a
framework
would
enable
to
“consider
the
use
of

FM
regression
in
the
context
of
vector
autoregressions
(VAR's)
with
some
unit
roots
and
some
cointegrating
relations”,

which
is
therefore
a
multivariate
extension,
accounting
for
the
underlying
structure
between
the
time
series.




 4

5. References



Chiang,
 M‐H.
 and
 Kao
 C.
 (2002).
 Nonstationary
 Panel
 Time
 Series
 Using
 NPT
 1.3
 ‐
 A
 User
 Guide,
 Center
 for
 Policy

Research,
Syracuse
University.


Im,
Kyung
So,
Pesaran,
M.
Hashem,
Shin
and
Yongcheol.
(2003).
Testing
for
Unit
Roots
in
Heterogeneous
Panels.
Journal

of
 Econometrics,
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 53‐74.
 Earlier
 version
 available
 as
 unpublished
 Working
 Paper,
 Dept.
 of
 Applied

Economics,
University
of
Cambridge,
Dec.
1997.



Kao,
 C.,
 Chiang,
 M.‐H.,
 (1998).
 On
 the
 Estimation
 and
 Inference
 of
 a
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 Regression
 in
 Panel
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 Working

Paper,
Center
for
Policy
Research,
Syracuse
University.


Kao,
C.
(1999).
Spurious
regression
and
residual‐based
tests
for
cointegration
in
panel
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of
Econometrics
90,

pp.
1‐44.


Kao,
C.,
Chiang,
M.H.
and
Chen,
B.
(1999).
International
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Application
of
Estimation
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in

Panel
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for
Policy
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Center
for
Policy
Research,
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School,

Syracuse
University.


Kao,
C.
and
Chiang,
M.H.
(2000),
On
the
estimation
and
inference
of
a
cointegrated
regression
in
panel
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in
Baltagi,

B.H.
(Ed.)
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Panel
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Amsterdam.


Levin,
Andrew,
Lin,
Chien‐Fu
and
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James
Chu.
(2002).
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(1999).
 A
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Mark,
Nelson
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and
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(2001).
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exchange
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and
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Evidence
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a
small

post‐Bretton
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pages
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Febr.


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 Peter
 C.B.
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C.
and
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skiing
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Global
Change.




 5