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Weak and Strong Cross Section Dependence and Estimation of Large Panels

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Author Info
Alexander Chudik () (Universidad de Salamanca, Campus Miguel de Unamuno, Salamanca, E-23007 Salamanca, España.)
M. Hashem Pesaran () (Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, UK.)
Elisa Tosetti () (Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, UK.)

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Abstract

This paper introduces the concepts of time-specific weak and strong cross section dependence. A double-indexed process is said to be cross sectionally weakly dependent at a given point in time, t, if its weighted average along the cross section dimension (N) converges to its expectation in quadratic mean, as N is increased without bounds for all weights that satisfy certain ‘granularity’ conditions. Relationship with the notions of weak and strong common factors is investigated and an application to the estimation of panel data models with an infinite number of weak factors and a finite number of strong factors is also considered. The paper concludes with a set of Monte Carlo experiments where the small sample properties of estimators based on principal components and CCE estimators are investigated and compared under various assumptions on the nature of the unobserved common effects. JEL Classification: C10, C31, C33.

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Paper provided by European Central Bank in its series Working Paper Series with number 1100.

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Length: 58 pages
Date of creation: Oct 2009
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Handle: RePEc:ecb:ecbwps:20091100

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Keywords: Panels; Strong and Weak Cross Section Dependence; Weak and Strong Factors.;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-23, September. [Downloadable!] (restricted)
  2. Ingersoll, Jonathan E, Jr, 1984. " Some Results in the Theory of Arbitrage Pricing," Journal of Finance, American Finance Association, vol. 39(4), pages 1021-39, September. [Downloadable!] (restricted)
  3. Gregory, Allan W. & Head, Allen C., 1999. "Common and country-specific fluctuations in productivity, investment, and the current account," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 423-451, December. [Downloadable!] (restricted)
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  4. Alexander Chudik & M. Hashem Pesaran, 2009. "Infinite-dimensional VARs and factor models," Working Paper Series 998, European Central Bank. [Downloadable!]
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  5. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2004. "Unobserved Heterogeneity in Panel Time Series Models," Birkbeck Working Papers in Economics and Finance 0403, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
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  6. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-3, International Conferences on Panel Data. [Downloadable!]
  7. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
  8. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
  9. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nicolas Debarsy & Cem Ertur, 2009. "Testing for Spatial Autocorrelation in a Fixed Effects Panel Data Model," Post-Print halshs-00414133_v1, HAL. [Downloadable!]
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