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Standardized LM tests for spatial error dependence in linear or panel regressions

  • Badi H. Baltagi
  • Zhenlin Yang

The robustness of the LM tests for spatial error dependence of Burridge (1980) for the linear regression model and Anselin (1988) for the panel regression model are examined. While both tests are asymptotically robust against distributional misspecification, their finite sample behavior can be sensitive to the spatial layout. To overcome this shortcoming, standardized LM tests are suggested. Monte Carlo results show that the new tests possess good finite sample properties. An important observation made throughout this study is that the LM tests for spatial dependence need to be both mean and variance-adjusted for good finite sample performance to be achieved. The former is, however, often neglected in the literature.

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Article provided by Royal Economic Society in its journal Econometrics Journal.

Volume (Year): 16 (2013)
Issue (Month): 1 (02)
Pages: 103-134

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Handle: RePEc:wly:emjrnl:v:16:y:2013:i:1:p:103-134
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  1. Benjamin Born & Jörg Breitung, 2009. "Simple Regression Based Tests for Spatial Dependence," Bonn Econ Discussion Papers bgse23_2009, University of Bonn, Germany.
  2. Robinson, P.M., 2008. "Correlation testing in time series, spatial and cross-sectional data," Journal of Econometrics, Elsevier, vol. 147(1), pages 5-16, November.
  3. Badi H. Baltagi & Seuck Heun Song & Won Koh, 2002. "Testing Panel Data Regression Models with Spatial Error Correlation," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B6-4, International Conferences on Panel Data.
  4. Debarsy, Nicolas & Ertur, Cem, 2010. "Testing for spatial autocorrelation in a fixed effects panel data model," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 453-470, November.
  5. Zhenlin Yang, 2009. "A Robust LM Test for Spatial Error Components," Development Economics Working Papers 22488, East Asian Bureau of Economic Research.
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  7. Koenker, Roger, 1981. "A note on studentizing a test for heteroscedasticity," Journal of Econometrics, Elsevier, vol. 17(1), pages 107-112, September.
  8. Hall, Peter & Horowitz, Joel L, 1996. "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, Econometric Society, vol. 64(4), pages 891-916, July.
  9. Lung-Fei Lee, 2004. "Asymptotic Distributions of Quasi-Maximum Likelihood Estimators for Spatial Autoregressive Models," Econometrica, Econometric Society, vol. 72(6), pages 1899-1925, November.
  10. Honda, Yuzo, 1991. "A standardized test for the error components model with the two-way layout," Economics Letters, Elsevier, vol. 37(2), pages 125-128, October.
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  13. Case, Anne C, 1991. "Spatial Patterns in Household Demand," Econometrica, Econometric Society, vol. 59(4), pages 953-65, July.
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