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Test for the Error Component Model in the Presence of Local Misspecification

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  • Anil Bera
  • Walter Sosa Escudero
  • Mann Yoon

Abstract

It is well known that most of the standard speci¯cation tests are not valid when the alternative hypothesis is misspeci¯ed. This is particularly true in the error component model, when one tests for either random e®ects or serial correlation without taking account of the presence of the other e®ect. In this paper we study the size and power of the standard Rao's score tests analytically and by simulation when the data is contaminated by local misspeci¯cation. These tests are adversely a®ected under misspeci¯cation. We suggest simple procedures to test for random e®ects (or serial correlation) in the presence of local serial correlation (or random e®ects), and these tests require ordinary least squares residuals only. Our Monte Carlo results demonstrate that the suggested tests have good ¯nite sample properties for local misspeci¯cation, and in some cases even for far distant misspeci¯cation. Our tests are also capable of detecting the right direction of the departure from the null hypothesis. We also provide some empirical illustrations to highlight the usefulness of our tests.

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Bibliographic Info

Paper provided by Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata in its series Department of Economics, Working Papers with number 022.

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Length: 29 pages
Date of creation: Mar 2000
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Handle: RePEc:lap:wpaper:022

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  1. Nerlove, Marc, 1971. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross Sections," Econometrica, Econometric Society, Econometric Society, vol. 39(2), pages 359-82, March.
  2. Hillier, Grant H., 1991. "On multiple diagnostic procedures for the linear model," Journal of Econometrics, Elsevier, Elsevier, vol. 47(1), pages 47-66, January.
  3. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(1), pages 239-53, January.
  4. Bera, Anil K. & Yoon, Mann J., 1993. "Specification Testing with Locally Misspecified Alternatives," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 9(04), pages 649-658, August.
  5. Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, Elsevier, vol. 11(3), pages 277-280, March.
  6. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, Econometric Society, vol. 46(5), pages 985-1012, September.
  7. Davidson , R. & Mackinnon, J.G., 1985. "Implicit alternatives and the local power of test statistics," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1985025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, Elsevier, vol. 20(1), pages 59-82, October.
  9. Baltagi, Badi H. & Chang, Young-Jae & Li, Qi, 1992. "Monte Carlo results on several new and existing tests for the error component model," Journal of Econometrics, Elsevier, Elsevier, vol. 54(1-3), pages 95-120.
  10. Baltagi, Badi H. & Li, Qi, 1995. "Testing AR(1) against MA(1) disturbances in an error component model," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 133-151, July.
  11. Honda, Yuzo, 1985. "Testing the Error Components Model with Non-normal Disturbances," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(4), pages 681-90, October.
  12. Saikkonen, Pentti, 1989. "Asymptotic relative efficiency of the classical test statistics under misspecification," Journal of Econometrics, Elsevier, Elsevier, vol. 42(3), pages 351-369, November.
  13. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 47-82, January.
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Cited by:
  1. Yang, Zhenlin, 2010. "A robust LM test for spatial error components," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 40(5), pages 299-310, September.
  2. Okui, Ryo, 2009. "Testing serial correlation in fixed effects regression models based on asymptotically unbiased autocorrelation estimators," Mathematics and Computers in Simulation (MATCOM), Elsevier, Elsevier, vol. 79(9), pages 2897-2909.
  3. Martí Ballester, Carmen Pilar, 2013. "Determinants of equity pension plan flows," Economics Discussion Papers, Kiel Institute for the World Economy 2013-15, Kiel Institute for the World Economy.
  4. Bera, Anil K. & Montes-Rojas, Gabriel & Sosa-Escudero, Walter, 2009. "Testing under local misspecification and artificial regressions," Economics Letters, Elsevier, Elsevier, vol. 104(2), pages 66-68, August.
  5. Walter Sosa Escudero & Federico Zincenko, 2008. "Tests for Dynamic Effects in Linear Panel Data Models," Working Papers, Universidad de San Andres, Departamento de Economia 95, Universidad de San Andres, Departamento de Economia, revised Feb 2008.
  6. Badi H. Baltagi & Byoung Cheol Jung & Seuck Heun Song, 2008. "Testing for Heteroskedasticity and Serial Correlation in a Random Effects Panel Data Model," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 111, Center for Policy Research, Maxwell School, Syracuse University.
  7. Pedro Elosegui & Paula Español & Demian Panigo & Juan Sotes Paladino, 2006. "Methodological Alternatives for the Analysis of Financial Constraints in Argentina," BCRA Working Paper Series 200602, Central Bank of Argentina, Economic Research Department.
  8. Walter Sosa Escudero, 2007. "Testing for Persistence in the Error Component Model:A One-Sided Approach," Working Papers, Universidad de San Andres, Departamento de Economia 94, Universidad de San Andres, Departamento de Economia, revised Feb 2007.
  9. Wu, Jianhong & Li, Guodong, 2014. "Moment-based tests for individual and time effects in panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 178(P3), pages 569-581.
  10. Christian Kleiber & Achim Zeileis, 2010. "The Grunfeld Data at 50," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 11, pages 404-417, November.
  11. Li, Yushu & Andersson, Fredrik N. G., 2013. "A Simple Wavelet-Based Test for Serial Correlation in Panel Data Models," Working Papers, Lund University, Department of Economics 2013:39, Lund University, Department of Economics.
  12. Dhehibi, Boubaker & Gil, Jose Maria & Angulo, Ana Maria, 2003. "Nutrient Effects On Consumer Demand: A Panel Data Approach," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa, International Association of Agricultural Economists 25881, International Association of Agricultural Economists.
  13. Giovanni Millo & Gaetano Carmeci, 2011. "Non-life insurance consumption in Italy: a sub-regional panel data analysis," Journal of Geographical Systems, Springer, Springer, vol. 13(3), pages 273-298, September.
  14. Walter Sosa-Escudero & Mariana Marchionni & Omar Arias, 2006. "Sources of Income Persistence: Evidence from Rural El Salvador," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0037, CEDLAS, Universidad Nacional de La Plata.
  15. Walter Sosa Escudero & Anil K. Bera, 2008. "Tests for Unbalanced Error Component Models Under Local Misspecication," CEDLAS, Working Papers, CEDLAS, Universidad Nacional de La Plata 0065, CEDLAS, Universidad Nacional de La Plata.
  16. Carmen Pilar Martí Ballester, 2014. "Determinants of equity pension plan flows," Estudios de Economia, University of Chile, Department of Economics, University of Chile, Department of Economics, vol. 41(1 Year 20), pages 125-148, June.
  17. Yves Croissant & Giovanni Millo, . "Panel Data Econometrics in R: The plm Package," Journal of Statistical Software, American Statistical Association, American Statistical Association, vol. 27(i02).

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