Test for the Error Component Model in the Presence of Local Misspecification
It is well known that most of the standard speci¯cation tests are not valid when the alternative hypothesis is misspeci¯ed. This is particularly true in the error component model, when one tests for either random e®ects or serial correlation without taking account of the presence of the other e®ect. In this paper we study the size and power of the standard Rao's score tests analytically and by simulation when the data is contaminated by local misspeci¯cation. These tests are adversely a®ected under misspeci¯cation. We suggest simple procedures to test for random e®ects (or serial correlation) in the presence of local serial correlation (or random e®ects), and these tests require ordinary least squares residuals only. Our Monte Carlo results demonstrate that the suggested tests have good ¯nite sample properties for local misspeci¯cation, and in some cases even for far distant misspeci¯cation. Our tests are also capable of detecting the right direction of the departure from the null hypothesis. We also provide some empirical illustrations to highlight the usefulness of our tests.
|Date of creation:||Mar 2000|
|Contact details of provider:|| Postal: Calle 48 No555 - La Plata (1900)|
Phone: 21- 1466
Web page: http://www.depeco.econo.unlp.edu.ar/doctrab.php
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
- Lillard, Lee A & Willis, Robert J, 1978.
"Dynamic Aspects of Earning Mobility,"
Econometric Society, vol. 46(5), pages 985-1012, September.
- Hillier, Grant H., 1991. "On multiple diagnostic procedures for the linear model," Journal of Econometrics, Elsevier, vol. 47(1), pages 47-66, January.
- Baltagi, Badi H. & Chang, Young-Jae & Li, Qi, 1992. "Monte Carlo results on several new and existing tests for the error component model," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 95-120.
- Nerlove, Marc, 1971.
"Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross Sections,"
Econometric Society, vol. 39(2), pages 359-382, March.
- Marc Nerlove, 1968. "Further Evidence on the Estimation of Dynamic Economic Relations from a Time Series of Cross-Sections," Cowles Foundation Discussion Papers 257, Cowles Foundation for Research in Economics, Yale University.
- Saikkonen, Pentti, 1989. "Asymptotic relative efficiency of the classical test statistics under misspecification," Journal of Econometrics, Elsevier, vol. 42(3), pages 351-369, November.
- Russell Davidson & James G. MacKinnon, 1984.
"Implicit Alternatives and the Local Power of Test Statistics,"
556, Queen's University, Department of Economics.
- Davidson, Russell & MacKinnon, James G, 1987. "Implicit Alternatives and the Local Power of Test Statistics," Econometrica, Econometric Society, vol. 55(6), pages 1305-1329, November.
- Davidson , R. & Mackinnon, J.G., 1985. "Implicit alternatives and the local power of test statistics," CORE Discussion Papers 1985025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- T. S. Breusch & A. R. Pagan, 1980.
"The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics,"
Review of Economic Studies,
Oxford University Press, vol. 47(1), pages 239-253.
- Breusch, T.S. & Pagan, A.R., "undated". "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP 412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, vol. 11(3), pages 277-280, March.
- Baltagi, Badi H. & Li, Qi, 1995. "Testing AR(1) against MA(1) disturbances in an error component model," Journal of Econometrics, Elsevier, vol. 68(1), pages 133-151, July.
- Bera, Anil K. & Yoon, Mann J., 1993. "Specification Testing with Locally Misspecified Alternatives," Econometric Theory, Cambridge University Press, vol. 9(04), pages 649-658, August.
- Yuzo Honda, 1985. "Testing the Error Components Model with Non-Normal Disturbances," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 681-690.
- Bera, Anil K. & Jarque, Carlos M., 1982. "Model specification tests : A simultaneous approach," Journal of Econometrics, Elsevier, vol. 20(1), pages 59-82, October.
When requesting a correction, please mention this item's handle: RePEc:lap:wpaper:022. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diego Fernandez Felices)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.