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Testing Slope Homogeneity in Large Panels

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  • M. Hashem Pesaran
  • Takashi Yamagata

Abstract

This paper proposes a modi?ed version of Swamy’s 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 ? 8. 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 vN/T ? 0, as (N, T) j ? 8. 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 signi?cant evidence of slope heterogeneity in the earnings dynamics, even when individuals with similar educational backgrounds are considered as sub-sets.

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File URL: http://www.usc.edu/dept/LAS/economics/IEPR/Working%20Papers/IEPR_05.14_%5BPesaran,Yamagata%5D.pdf
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Bibliographic Info

Paper provided by Institute of Economic Policy Research (IEPR) in its series IEPR Working Papers with number 05.14.

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Length: 40 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:scp:wpaper:05-14

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Keywords: Testing Slope Homogeneity; Hausman Type Tests; Cross Section ispersion Tests; Monte Carlo Results; PSID Earnings Dynamics;

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References

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  17. 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.
  18. Ullah, Aman, 2004. "Finite Sample Econometrics," OUP Catalogue, Oxford University Press, edition 1, number 9780198774488, Octomber.
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