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Testing for Persistence in the Error Component Model:A One-Sided Approach

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Author Info

  • Walter Sosa Escudero

    ()
    (Department of Economics, Universidad de San Andres)

Abstract

This paper proposes new simple testing procedures for the joint null hypothesis of absence of persistent e®ects in the form of random e®ects and ¯rst order serial correlation in the error component model. The fact that the presence of random effects is clearly of a one-sided nature, together with the fact that in many empirical applications researchers worry about positive serial correlation leaves room for a power gain that arises from restricting the parameter space under the alternative hypothesis, compared to existing procedures that allow for two-sided alternatives. A Monte Carlo experiment shows that the proposed statistics have good size and power performance in very small samples like those typically used in applied work in panel data. An empirical example illustrates the usefulness of the proposed statistics.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc94.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 94.

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Length: 22 pages
Date of creation: Feb 2007
Date of revision: Feb 2007
Handle: RePEc:sad:wpaper:94

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Related research

Keywords: error component model; testing; random effects; serial correlation; one-sided alternatives;

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References

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  1. 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, vol. 47(1), pages 239-53, January.
  2. Anil K. Bera & Walter Sosa Escudero & Mann Yoon, 2000. "Tests for the Error Component Model in the Presence of Local Misspecification," Econometric Society World Congress 2000 Contributed Papers 1888, Econometric Society.
  3. Samuel Freije & Andre Potela Souza, 2002. "Earnings Dynamics and Inequality in Venezuela: 1995-1997," Vanderbilt University Department of Economics Working Papers 0211, Vanderbilt University Department of Economics.
  4. Inoue, Atsushi & Solon, Gary, 2006. "A Portmanteau Test For Serially Correlated Errors In Fixed Effects Models," Econometric Theory, Cambridge University Press, vol. 22(05), pages 835-851, October.
  5. Walter Sosa-Escudero & Mariana Marchionni & Omar Arias, 2006. "Sources of Income Persistence: Evidence from Rural El Salvador," CEDLAS, Working Papers 0037, CEDLAS, Universidad Nacional de La Plata.
  6. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  7. Maxwell King & Ping Wu, 1997. "Locally optimal one-sided tests for multiparameter hypotheses," Econometric Reviews, Taylor & Francis Journals, vol. 16(2), pages 131-156.
  8. Hendry, David F & Mizon, Grayham E, 1978. "Serial Correlation as a Convenient Simplification, not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England," Economic Journal, Royal Economic Society, vol. 88(351), pages 549-63, September.
  9. Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, vol. 11(3), pages 277-280, March.
  10. 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, vol. 54(1-3), pages 95-120.
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Cited by:
  1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.

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