Zhenlin Yang () (School of Economics, Singapore Management University)
Abstract
This paper presents a modified LM test of spatial error components, which is shown to be robust against distributional misspecifications and spatial layouts. The proposed test differs from the LM test of Anselin (2001) by a term in the denominators of the test statistics. This term disappears when either the errors are normal, or the variance of the diagonal elements of the product of spatial weights matrix and its transpose is zero or approaching to zero as sample size goes large. When neither is true, as is often the case in practice, the effect of this term can be significant even when sample size is large. As a result, there can be severe size distortions of the Anselin’s LM test, a phenomenon revealed by the Monte Carlo results of Anselin and Moreno (2003) and further confirmed by the Monte Carlo results presented in this paper. Our Monte Carlo results also show that the proposed test performs well in general.
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Publisher Info
Paper provided by Singapore Management University, School of Economics in its series Working Papers with number
04-2009.
Length: 19 pages Date of creation: Jan 2009 Date of revision: Publication status: Published in SMU Economics and Statistics Working Paper Series Handle: RePEc:siu:wpaper:04-2009
Find related papers by JEL classification: C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data C5 - Mathematical and Quantitative Methods - - Econometric Modeling
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