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A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model

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  • Baltagi, Badi H.
  • Feng, Qu
  • Kao, Chihwa

Abstract

It is well known that the standard Breusch and Pagan (1980) LM test for cross-equation correlation in a SUR model is not appropriate for testing cross-sectional dependence in panel data models when the number of cross-sectional units (n) is large and the number of time periods (T) is small. In fact, a scaled version of this LM test was proposed by Pesaran (2004) and its finite sample bias was corrected by Pesaran et al. (2008). This was done in the context of a heterogeneous panel data model. This paper derives the asymptotic bias of this scaled version of the LM test in the context of a fixed effects homogeneous panel data model. This asymptotic bias is found to be a constant related to n and T, which suggests a simple bias corrected LM test for the null hypothesis. Additionally, the paper carries out some Monte Carlo experiments to compare the finite sample properties of this proposed test with existing tests for cross-sectional dependence.

Suggested Citation

  • Baltagi, Badi H. & Feng, Qu & Kao, Chihwa, 2012. "A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model," Journal of Econometrics, Elsevier, vol. 170(1), pages 164-177.
  • Handle: RePEc:eee:econom:v:170:y:2012:i:1:p:164-177 DOI: 10.1016/j.jeconom.2012.04.004
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    Cited by:

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    2. Badi Baltagi & Chihwa Kao & Fa wang, 2016. "Asymptotic Power of the Sphericity Test Under Weak and Strong Factors in a Fixed Effects Panel Data Model," Center for Policy Research Working Papers 189, Center for Policy Research, Maxwell School, Syracuse University.
    3. Raihan, Selim & Abdullah, S M & Barkat, Aroni & Siddiqua, Salina, 2017. "Mean Reversion of the Real Exchange Rate and the validity of PPP Hypothesis in the context of Bangladesh: A Holistic Approach," MPRA Paper 77172, University Library of Munich, Germany.
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    13. Halunga, Andreea G. & Orme, Chris D. & Yamagata, Takashi, 2017. "A heteroskedasticity robust Breusch–Pagan test for Contemporaneous correlation in dynamic panel data models," Journal of Econometrics, Elsevier, pages 209-230.
    14. Jiti Gao & Guangming Pan & Yanrong Yang, 2016. "CEstimation of Structural Breaks in Large Panels with Cross-Sectional Dependence," Monash Econometrics and Business Statistics Working Papers 12/16, Monash University, Department of Econometrics and Business Statistics.
    15. Mao, Guangyu, 2014. "A note on tests of sphericity and cross-sectional dependence for fixed effects panel model," Economics Letters, Elsevier, vol. 122(2), pages 215-219.
    16. Shahbaz, Muhammad & Syed, Jawad & Kumar, Mantu & Hammoudeh, Shawkat, 2017. "Does globalization worsen environmental quality in developed economies?," MPRA Paper 80055, University Library of Munich, Germany, revised 06 Jul 2017.

    More about this item

    Keywords

    LM test; Cross-sectional dependence; Fixed effects; High dimensional inference; John test; Panel data;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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