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Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models

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  • Hsiao, C.
  • Pesaran, M.H.
  • Pick, A.

Abstract

In this paper we discuss tests for residual cross section dependence in nonlinear panel data models. The tests are based on average pair-wise residual correlation coefficients. In nonlinear models, the definition of the residual is ambiguous and we consider two approaches: deviations of the observed dependent variable from its expected value and generalized residuals. We show the asymptotic consistency of the cross section dependence (CD) test of Pesaran (2004). In Monte Carlo experiments it emerges that the CD test has the correct size for any combination of N and T whereas the LM test relies on T large relative to N. We then analyze the roll-call votes of the 104th U.S. Congress and find considerable dependence between the votes of the members of Congress.

Suggested Citation

  • Hsiao, C. & Pesaran, M.H. & Pick, A., 2007. "Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models," Cambridge Working Papers in Economics 0716, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0716
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    References listed on IDEAS

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    1. Ullah, Aman, 2004. "Finite Sample Econometrics," OUP Catalogue, Oxford University Press, number 9780198774488.
    2. M. Hashem Pesaran & Aman Ullah & Takashi Yamagata, 2008. "A bias-adjusted LM test of error cross-section independence," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 105-127, March.
    3. Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
    4. Gourieroux, Christian & Monfort, Alain & Renault, Eric & Trognon, Alain, 1987. "Generalised residuals," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 5-32.
    5. H. Kelejian, Harry & Prucha, Ingmar R., 2001. "On the asymptotic distribution of the Moran I test statistic with applications," Journal of Econometrics, Elsevier, vol. 104(2), pages 219-257, September.
    6. Frees, Edward W., 1995. "Assessing cross-sectional correlation in panel data," Journal of Econometrics, Elsevier, vol. 69(2), pages 393-414, October.
    7. Gourieroux, C. & Monfort, A. & Trognon, A., 1985. "A General Approach to Serial Correlation," Econometric Theory, Cambridge University Press, vol. 1(03), pages 315-340, December.
    8. Chesher, Andrew & Irish, Margaret, 1987. "Residual analysis in the grouped and censored normal linear model," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 33-61.
    9. Ng, Serena, 2006. "Testing Cross-Section Correlation in Panel Data Using Spacings," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 12-23, January.
    10. Lee, Lung-Fei, 2002. "Consistency And Efficiency Of Least Squares Estimation For Mixed Regressive, Spatial Autoregressive Models," Econometric Theory, Cambridge University Press, vol. 18(02), pages 252-277, April.
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    Cited by:

    1. Vasilis Sarafidis & Tom Wansbeek, 2012. "Cross-Sectional Dependence in Panel Data Analysis," Econometric Reviews, Taylor & Francis Journals, vol. 31(5), pages 483-531, September.
    2. Martí Ballester, Carmen Pilar, 2013. "Determinants of equity pension plan flows," Economics Discussion Papers 2013-15, Kiel Institute for the World Economy (IfW).
    3. Leyla Mammadova & Aytan Mammadova & Fuad Mammadov & Leyla Yusifzada, 2016. "Determinants of Depositors’ Behaviour: Heterogeneous Panel Estimates," Working Papers 1603, Central Bank of Azerbaijan Republic.
    4. Zeidan, Rodrigo & Müllner, Jakob, 2015. "Firm, market and top management antecedents of speculation: Lessons for corporate governance," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 42-58.
    5. Guangming Pan & Jiti Gao & Yanrong Yang & Meihui Guo, 2015. "Cross-sectional Independence Test for a Class of Parametric Panel Data Models," Monash Econometrics and Business Statistics Working Papers 17/15, Monash University, Department of Econometrics and Business Statistics.

    More about this item

    Keywords

    Cross-section dependence; nonlinear panel data model.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions

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