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Testing Slope Homogeneity in Large Panels

  • Pesaran, M.H.
  • Yamagata. T.

This paper proposes a modified 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). We exploit the cross section dispersion of individual slopes weighted by their relative precision. Using Monte Carlo experiments, we show 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 test performs well for moderate values of the root of the autoregressive process, but with roots near unity a bias-corrected bootstrapped version performs well even if N is large relative to T. The cross section dispersion tests are used to test the homogeneity of slopes in autoregressive models of individual earnings using the PSID data and show statistically significant evidence of slope heterogeneity in the earnings dynamics.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe0513.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0513.

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Length: 53
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:cam:camdae:0513
Note: EM
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  2. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  3. repec:cup:cbooks:9780521522717 is not listed on IDEAS
  4. Maurice J.G. Bun, 2004. "Testing poolability in a system of dynamic regressions with nonspherical disturbances," Empirical Economics, Springer, vol. 29(1), pages 89-106, January.
  5. Jinyong Hahn & Guido Kuersteiner, 2002. "Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects when Both "n" and "T" Are Large," Econometrica, Econometric Society, vol. 70(4), pages 1639-1657, July.
  6. repec:ner:tilbur:urn:nbn:nl:ui:12-153205 is not listed on IDEAS
  7. Lutz Kilian, 1998. "Confidence intervals for impulse responses under departures from normality," Econometric Reviews, Taylor & Francis Journals, vol. 17(1), pages 1-29.
  8. Costas Meghir & Luigi Pistaferri, 2001. "Income variance dynamics and heterogenity," IFS Working Papers W01/07, Institute for Fiscal Studies.
  9. Cheng Hsiao & M. Hashem Pesaran, 2004. "Random Coefficient Panel Data Models," IEPR Working Papers 04.2, Institute of Economic Policy Research (IEPR).
  10. Javier Alvarez & Martin Browning & Mette Ejrnæs, 2001. "Modelling Income Processes with lots of heterogeneity," CAM Working Papers 2002-01, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  11. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  12. Holly, Alberto, 1982. "A Remark on Hausman's Specification Test," Econometrica, Econometric Society, vol. 50(3), pages 749-59, May.
  13. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March.
  14. Magnus, J.R., 1978. "The moments of products of quadratic forms in normal variables," Other publications TiSEM 17c77a44-1789-4cf4-a382-a, Tilburg University, School of Economics and Management.
  15. Javier Alvarez & Manuel Arellano, 2003. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Econometrica, Econometric Society, vol. 71(4), pages 1121-1159, 07.
  16. Andrews, Donald W K, 1993. "Exactly Median-Unbiased Estimation of First Order Autoregressive/Unit Root Models," Econometrica, Econometric Society, vol. 61(1), pages 139-65, January.
  17. Kiviet, Jan F. & Phillips, Garry D. A., 1994. "Bias assessment and reduction in linear error-correction models," Journal of Econometrics, Elsevier, vol. 63(1), pages 215-243, July.
  18. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
  19. repec:ner:tilbur:urn:nbn:nl:ui:12-153208 is not listed on IDEAS
  20. Horowitz, Joel L., 1994. "Bootstrap-based critical values for the information matrix test," Journal of Econometrics, Elsevier, vol. 61(2), pages 395-411, April.
  21. Ullah, Aman, 2004. "Finite Sample Econometrics," OUP Catalogue, Oxford University Press, edition 1, number 9780198774488, March.
  22. repec:cup:cbooks:9780521818551 is not listed on IDEAS
  23. Pesaran, H. & Smith, R. & Im, K.S., 1995. "Dynamic Linear Models for Heterogeneous Panels," Cambridge Working Papers in Economics 9503, Faculty of Economics, University of Cambridge.
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