Three essays on dependent panels: empirical evidence

Abstract

The assumption of cross-sectionally independent units in the panel data may fail due to common shocks and spillover effects. This dissertation mainly deals with the issue of cross-sectional dependence when conducting empirical researches. This objective is accomplished by utilizing advanced panel methods. This dissertation consists of three empirical studies exploring the improvements in econometric methods to investigate three different yet equivalently interesting topics. The first essay contributes to the literature of tourism studies. It is the first paper to account for cross-sectional dependence when estimating the tourism demand elasticities. Using a quarterly panel of 48 states on the mainland of the US form 1993Q1 to 2011Q2, I found that the conventional estimation method is unable to control for unobserved common factors in the variables appropriately. As a result, it leaves common factors that are nonstationary in the regression errors and causes counter-intuitive estimations. To solve the problem of cross-sectional dependence, I use advanced methods for dependent panel and reestimate the tourism demand elasticities for Hawaii. In the second essay, I study the degree of consumption smoothing through international markets using a annual panel of 158 countries during the year of 1970 to 2010. To estimate the degree of consumption smoothing, I compare different methods of separating the common and the idiosyncratic shocks from observed data. I show that the conventional method fails to control for aggregate shocks completely. I reestimate the degree of consumption smoothing with the statistically defensible CCE estimators. In the last essay, I re-examine the degree of gasoline market integration in the US, accounting for both cross-sectional dependence and structural breaks. I test for the law of one price (LOP) within state-level retail gasoline markets. To deal with the adverse effects of cross-sectional dependence and structural breaks on the residuals of the LOP regression model, I propose a hybrid panel unit root test. Using the hybrid method, I fail to find a constant cointegrating relationship between state gasoline prices and the national average price in the US.