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Heteroskedasticity and Spatiotemporal Dependence Robust Inference for Linear Panel Models with Fixed Effects

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  • Min Seong Kim

    () (Department of Economics, Ryerson University, Toronto, Canada)

  • Yixiao Sun

    () (DEpartment of Economics, University of California, San Diego)

Abstract

This paper studies robust inference for linear panel models with fixed effects in the presence of heteroskedasticity and spatiotemporal dependence of unknown forms. We propose a bivariate kernel covariance estimator that is flexible to nest existing estimators as special cases with certain choices of bandwidths. For distributional approximations, we embed the level of smoothing and the sample size in two different limiting sequences. In the first case where the level of smoothing increases with the sample size, the proposed covariance estimator is consistent and the associated Wald statistic converges to a chi square distribution. We show that our covariance estimator improves upon existing estimators in terms of robustness and efficiency. In the second case where the level of smoothing is fixed, the covariance estimator has a random limit and we show by asymptotic expansion that the limiting distribution of the Wald statistic depends on the bandwidth parameters, the kernel function, and the number of restrictions being tested. As this distribution is nonstandard, we establish the validity of a convenient F-approximation to this distribution. For bandwidth selection, we employ and optimize a modified asymptotic mean square error criterion. The fl exibility of our estimator and the proposed bandwidth selection procedure make our estimator adaptive to the dependence structure. This adaptiveness effectively automates the selection of covariance estimators. Simulation results show that our proposed testing procedure works reasonably well in finite samples.

Suggested Citation

  • Min Seong Kim & Yixiao Sun, 2011. "Heteroskedasticity and Spatiotemporal Dependence Robust Inference for Linear Panel Models with Fixed Effects," Working Papers 029, Ryerson University, Department of Economics.
  • Handle: RePEc:rye:wpaper:wp029
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    Citations

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    Cited by:

    1. Hidalgo, Javier & Schafgans, Marcia, 2017. "Inference and testing breaks in large dynamic panels with strong cross sectional dependence," Journal of Econometrics, Elsevier, vol. 196(2), pages 259-274.
    2. Stigler, Matthieu M., 2018. "Supply response at the field-level: disentangling area and yield effects," 2018 Annual Meeting, August 5-7, Washington, D.C. 274343, Agricultural and Applied Economics Association.
    3. D. M. Lambert & C. N. Boyer & L. He, 2016. "Spatial-temporal heteroskedastic robust covariance estimation for Markov transition probabilities: an application examining land use change," Letters in Spatial and Resource Sciences, Springer, vol. 9(3), pages 353-362, October.
    4. Javier Hidalgo & Marcia M Schafgans, 2015. "Inference and Testing Breaks in Large Dynamic Panels with Strong Cross Sectional Dependence," STICERD - Econometrics Paper Series /2015/583, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    5. Kim, Min Seong & Sun, Yixiao & Yang, Jingjing, 2017. "A fixed-bandwidth view of the pre-asymptotic inference for kernel smoothing with time series data," Journal of Econometrics, Elsevier, vol. 197(2), pages 298-322.
    6. repec:mup:actaun:actaun_2013061072151 is not listed on IDEAS
    7. David Powell, 2017. "Inference with Correlated Clusters," Working Papers WR-1137-1, RAND Corporation.
    8. repec:eee:econom:v:203:y:2018:i:1:p:80-95 is not listed on IDEAS
    9. Jiti Gao & Kai Xia, 2017. "Heterogeneous panel data models with cross-sectional dependence," Monash Econometrics and Business Statistics Working Papers 16/17, Monash University, Department of Econometrics and Business Statistics.
    10. Hidalgo, Javier & Schafgans, Marcia M. A., 2017. "Inference without smoothing for large panels with cross-sectional and temporal dependence," LSE Research Online Documents on Economics 87748, London School of Economics and Political Science, LSE Library.
    11. Hwang, Jungbin & Sun, Yixiao, 2015. "Should We Go One Step Further? Â An Accurate Comparison of One-step and Two-step Procedures in a Generalized Method of Moments Framework," University of California at San Diego, Economics Working Paper Series qt58r2z98m, Department of Economics, UC San Diego.

    More about this item

    Keywords

    Adaptiveness; HAC estimator; F-approximation; Fixed-smoothing asymptotics; Increasing-smoothing asymptotics; Panel data; Optimal bandwidth; Robust inference; Spatiotemporal dependence;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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