A note on tests of sphericity and cross-sectional dependence for fixed effects panel model
AbstractThis paper theoretically explains why bias correction appears in two statistics recently developed by Baltagi et al. (2011, 2012), which are designed to test the sphericity and cross-sectional dependence of the errors in the fixed effects panel model respectively. Our explanation shows that the bias correction is in fact avoidable, which is demonstrated by two corresponding statistics that are newly constructed in this paper. Simulation suggests that our statistics perform as well as the two in Baltagi et al. (2011, 2012). In addition, according to the theories underlying our explanation, we extend a new sphericity test proposed by Fisher et al. (2010) to the fixed effects model. Simulation finds that the test behaves well only if both the cross-sectional and the time series dimension are large.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 122 (2014)
Issue (Month): 2 ()
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Web page: http://www.elsevier.com/locate/ecolet
Cross-sectional dependence; Fixed effects; Large panels; Sphericity;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
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- James R. Schott, 2005. "Testing for complete independence in high dimensions," Biometrika, Biometrika Trust, vol. 92(4), pages 951-956, December.
- Badi H. Baltagi & Qu Feng & Chihwa Kao, 2012.
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Center for Policy Research Working Papers
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- Baltagi, Badi H. & Feng, Qu & Kao, Chihwa, 2012. "A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model," Journal of Econometrics, Elsevier, vol. 170(1), pages 164-177.
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CORE Discussion Papers RP
-412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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- Fisher, Thomas J. & Sun, Xiaoqian & Gallagher, Colin M., 2010. "A new test for sphericity of the covariance matrix for high dimensional data," Journal of Multivariate Analysis, Elsevier, vol. 101(10), pages 2554-2570, November.
- Badi H. Baltagi & Qu Feng & Chihwa Kao, 2011. "Testing for sphericity in a fixed effects panel data model," Econometrics Journal, Royal Economic Society, vol. 14(1), pages 25-47, February.
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