Testing Slope Homogeneity in Large Panels
AbstractThis paper proposes a modified version of Swamyâs test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T) . The proposed test exploits the cross section dispersion of individual slopes weighted by their relative precision. In the case of models with strictly exogenous regressors and normally distributed errors, the test is shown to have a standard normal distribution as (N, T) → j ∞. Under non-normal errors and in the case of stationary dynamic models, the condition on the relative expansion rates of N and T for the test to be valid is given by √ N /T → 0, as (N, T) → j ∞. Using Monte Carlo experiments, it is shown that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T . For autoregressive (AR) models the proposed test performs well for moderate values of the root of the autoregressive process. But for AR models with roots near unity a bias-corrected bootstrapped version of the test is proposed which performs well even if N is large relative to T . The proposed cross section dispersion tests are applied to testing the homogeneity of slopes in autoregressive models of individual earnings using the PSID data. The results show statistically significant evidence of slope heterogeneity in the earnings dynamics, even when individuals with similar educational backgrounds are considered as sub-sets.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1438.
Date of creation: 2005
Date of revision:
testing slope homogeneity; Hausman type tests; cross section dispersion tests; Monte Carlo results; PSID earnings dynamics;
Other versions of this item:
- Pesaran, M.H. & Yamagata. T., 2005. "Testing Slope Homogeneity in Large Panels," Cambridge Working Papers in Economics 0513, Faculty of Economics, University of Cambridge.
- M. Hashem Pesaran & Takashi Yamagata, 2005. "Testing Slope Homogeneity in Large Panels," IEPR Working Papers 05.14, Institute of Economic Policy Research (IEPR).
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-30 (All new papers)
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