Panicca: Panic on Cross‐Section Averages

The cross-section average (CA) augmentation approach of Pesaran (2007) and Pesaran et al. (2013), and the principal components-based panel analysis of non-stationarity in idiosyncratic and common components (PANIC) of Bai and Ng (2004, 2010) 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.