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Exponent of Cross-sectional Dependence: Estimation and Inference

  • Bailey, N.
  • Kapetanios, G.
  • Pesaran, M. H.

An important issue in the analysis of cross-sectional dependence which has received renewed interest in the past few years is the need for a better understanding of the extent and nature of such cross dependencies. In this paper we focus on measures of cross-sectional dependence and how such measures are related to the behaviour of the aggregates defined as cross-sectional averages. We endeavour to determine the rate at which the cross-sectional weighted average of a set of variables appropriately demeaned, tends to zero. One parameterisation sets this to be , for . Given the fashion in which it arises, we refer to as the exponent of cross-sectional dependence. We derive an estimator of from the estimated variance of the cross-sectional average of the variables under consideration. We propose bias corrected estimators, derive their asymptotic properties and consider a number of extensions. We include a detailed Monte Carlo study supporting the theoretical results. Finally, we undertake an empirical investigation of using the S&P 500 data-set, and a large number of macroeconomic variables across and within countries.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1206.pdf
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Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1206.

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Date of creation: 23 Jan 2012
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Handle: RePEc:cam:camdae:1206
Contact details of provider: Web page: http://www.econ.cam.ac.uk/index.htm

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  1. Ambrogio Cesa-Bianchi & M. Hashem Pesaran & Alessandro Rebucci & TengTeng Xu, 2012. "China’s Emergence in the World Economy and Business Cycles in Latin America," Working Papers 12-32, Bank of Canada.
  2. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  3. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037, March.
  4. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2004. "Exploring the International Linkages of the Euro Area: A Global VAR Analysis," IEPR Working Papers 04.6, Institute of Economic Policy Research (IEPR).
  5. M Hashem Pesaran & Takashi Yamagata, 2012. "Testing CAPM with a Large Number of Assets," Discussion Papers 12/05, Department of Economics, University of York.
  6. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
  7. Eklund, Jana & Kapetanios, George & Price, Simon, 2010. "Forecasting in the presence of recent structural change," Bank of England working papers 406, Bank of England.
  8. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
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