Testing for Sphericity in a Fixed Effects Panel Data Model (Revised July 2009)
This paper proposes a test for sphericity in a fixed effects panel data model. It uses the Random Matrix Theory based approach of Ledoit and Wolf (2002) to test for sphericity of the error terms in a fixed effects panel model with a large number of cross-sectional units and time series observations. Since the errors are unobservable, the residuals from the fixed effects regression are used. The limiting distribution of the proposed test statistic is derived. Additionally, its finite sample properties are examined using Monte Carlo simulations.
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- Ledoit, Olivier & Wolf, Michael, 2004.
"A well-conditioned estimator for large-dimensional covariance matrices,"
Journal of Multivariate Analysis,
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- M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
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- Birke, Melanie & Dette, Holger, 2005. "A note on testing the covariance matrix for large dimension," Statistics & Probability Letters, Elsevier, vol. 74(3), pages 281-289, October. Full references (including those not matched with items on IDEAS)
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