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Testing for Sphericity in a Fixed Effects Panel Data Model (Revised July 2009)

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Author Info
Badi H. Baltagi () (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)
Qu Feng ()
Chihwa Kao () (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)

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Abstract

This paper proposes a test for sphericity in a fixed effects panel data model. It uses the Random Matrix Theory based approach of Ledoit and Wolf (2002) to test for sphericity of the error terms in a fixed effects panel model with a large number of cross-sectional units and time series observations. Since the errors are unobservable, the residuals from the fixed effects regression are used. The limiting distribution of the proposed test statistic is derived. Additionally, its finite sample properties are examined using Monte Carlo simulations.

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Publisher Info
Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 112.

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Length: 31 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:max:cprwps:112

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Related research
Keywords: Sphericity; panel data; cross-sectional dependence; John test;

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Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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  1. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07. [Downloadable!] (restricted)
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  2. M. Hashem Pesaran & Aman Ullah & Takashi Yamagata, 2008. "A bias-adjusted LM test of error cross-section independence," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 105-127, 03. [Downloadable!] (restricted)
    Other versions:
  3. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 239-53, January. [Downloadable!] (restricted)
  4. Baltagi, Badi H. & Song, Seuck Heun & Koh, Won, 2003. "Testing panel data regression models with spatial error correlation," Journal of Econometrics, Elsevier, vol. 117(1), pages 123-150, November. [Downloadable!] (restricted)
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  5. Ledoit, Olivier & Wolf, Michael, 2004. "A well-conditioned estimator for large-dimensional covariance matrices," Journal of Multivariate Analysis, Elsevier, vol. 88(2), pages 365-411, February. [Downloadable!] (restricted)
  6. Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Ng, Serena, 2006. "Testing Cross-Section Correlation in Panel Data Using Spacings," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 12-23, January. [Downloadable!] (restricted)
  8. Birke, Melanie & Dette, Holger, 2005. "A note on testing the covariance matrix for large dimension," Statistics & Probability Letters, Elsevier, vol. 74(3), pages 281-289, October. [Downloadable!] (restricted)
  9. Donald W. K. Andrews, 2005. "Cross-Section Regression with Common Shocks," Econometrica, Econometric Society, vol. 73(5), pages 1551-1585, 09. [Downloadable!] (restricted)
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  10. Lee, Lung-Fei, 2002. "Consistency And Efficiency Of Least Squares Estimation For Mixed Regressive, Spatial Autoregressive Models," Econometric Theory, Cambridge University Press, vol. 18(02), pages 252-277, April. [Downloadable!]
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This page was last updated on 2009-11-27.

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