Could anybody explain that while performing the system GMM model, I have to perform a unit root test or not? I have data from 46 firms for 12 years, but while performing the Levin-Lin-Chiu test in Stata software, it shows the following "Levin-Lin-Chiu test requires strongly balanced data".
You should do that...........run Fisher-type unit root test as it also useful for unbalanced panel data...........see my articles for more information
Testing for unit roots is also of high importance when we have to deal with panel data. In the panel unit root test framework, two generations of tests have been developed. The first generation contains the Levin, Lin and Chu test (2002), Im, Pesaran and Shin test (2003) and Fisher -type tests, whose main limit is the assumption of cross-sectional independence across units. A second generation of tests that rejects the cross-sectional independence hypothesis also exist. Within this second generation of tests, two main approaches can be distinguished: the covariance restrictions approach, adopted by Chang (2002, 2004), and the factor structure approach, including contributions by Phillips and Sul (2003), Moon and Perron (2004), Choi (2002) and Pesaran (2003).
Most econometric packages incl. Stata contain the first generation tests. However, some of them (eg. the Levin-Lin-Chiu test) require strongly balanced data (namely not to have missing values). So, you proceed with the rest tests without any problem.
Cheers!
Dimitris
Thanks Dimitris Anastasiou for sharing your in-depth insight on my query.
Regards
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