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Testing for serial correlation and random effects in a two-way error component regression model

  • Wu, Jianhong
  • Zhu, Lixing

In this paper, we test the existence of serial correlation and random effects in a two-way error component regression model with panel data. Under moment conditions alone, we suggest several easily implemented tests based on the parameter estimators for artificial autoregressions modeled by the differences in residuals. Under the null hypotheses, the tests for serial correlation are two-sided and asymptotically chi-square distributed, whereas those for random effects are one-sided, and are asymptotically standard normally distributed variables. Moreover, these methods can also be used similarly to construct tests for both serial correlation and individual effects jointly, whether or not time effects are present. The proposed tests are able to detect local alternatives that are distinct from the null at the parametric rate. Monte Carlo simulations and real data applications are carried out for purposes of illustration.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999311001386
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 6 ()
Pages: 2377-2386

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2377-2386
DOI: 10.1016/j.econmod.2011.06.006
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Anil Bera & Walter Sosa Escudero & Mann Yoon, 2000. "Test for the Error Component Model in the Presence of Local Misspecification," Department of Economics, Working Papers 022, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  2. Marc Nerlove, 1968. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross-Sections," Cowles Foundation Discussion Papers 257, Cowles Foundation for Research in Economics, Yale University.
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  7. Yuzo Honda, 1985. "Testing the Error Components Model with Non-Normal Disturbances," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 681-690.
  8. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP 412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  10. Alicia H. Munnell, 1990. "Why has productivity growth declined? Productivity and public investment," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-22.
  11. Baltagi, Badi H. & Heun Song, Seuck & Cheol Jung, Byoung & Koh, Won, 2007. "Testing for serial correlation, spatial autocorrelation and random effects using panel data," Journal of Econometrics, Elsevier, vol. 140(1), pages 5-51, September.
  12. 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.
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