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Testing Cross-sectional Correlation in Large Panel Data Models with Serial Correlation

Author

Listed:
  • Badi H. Baltagi

    (Syracuse University)

  • Chihwa Kao

    (University of Connecticut)

  • Bin Peng

    (Huazhong University of Science and Technology)

Abstract

This paper considers the problem of testing cross-sectional correlation in large panel data models with serially correlated errors. It finds that existing tests for cross-sectional correlation encounter size distortions with serial correlation in the errors. To control the size, this paper proposes a modification of Pesaran’s CD test to account for serial correlation of an unknown form in the error term. We derive the limiting distribution of this test as (N, T) → ∞. The test is distribution free and allows for unknown forms of serial correlation in the errors. Monte Carlo simulations show that the test has good size and power for large panels when serial correlation in the errors is present. JEL Classification: C13; C33 Key words: Cross-sectional Correlation Test; Serial Correlation; Large Panel Data Model

Suggested Citation

  • Badi H. Baltagi & Chihwa Kao & Bin Peng, 2016. "Testing Cross-sectional Correlation in Large Panel Data Models with Serial Correlation," Working papers 2016-32, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2016-32
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    References listed on IDEAS

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    1. James R. Schott, 2005. "Testing for complete independence in high dimensions," Biometrika, Biometrika Trust, vol. 92(4), pages 951-956, December.
    2. M. Hashem Pesaran, 2015. "Testing Weak Cross-Sectional Dependence in Large Panels," Econometric Reviews, Taylor & Francis Journals, vol. 34(6-10), pages 1089-1117, December.
    3. Chen, Song Xi & Qin, Yingli, 2010. "A Two Sample Test for High Dimensional Data with Applications to Gene-set Testing," MPRA Paper 59642, University Library of Munich, Germany.
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    7. Baltagi, Badi H. & Feng, Qu & Kao, Chihwa, 2012. "A Lagrange Multiplier test for cross-sectional dependence in a fixed effects panel data model," Journal of Econometrics, Elsevier, vol. 170(1), pages 164-177.
    8. Badi H. Baltagi & Qu Feng & Chihwa Kao, 2011. "Testing for sphericity in a fixed effects panel data model," Econometrics Journal, Royal Economic Society, vol. 14, pages 25-47, February.
    9. 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.
    10. Baltagi, Badi H. & Song, Seuck Heun & Koh, Won, 2003. "Testing panel data regression models with spatial error correlation," Journal of Econometrics, Elsevier, vol. 117(1), pages 123-150, November.
    11. Baltagi, Badi H., 2015. "The Oxford Handbook of Panel Data," OUP Catalogue, Oxford University Press, number 9780199940042.
    12. Lee, Lung-Fei, 2002. "Consistency And Efficiency Of Least Squares Estimation For Mixed Regressive, Spatial Autoregressive Models," Econometric Theory, Cambridge University Press, vol. 18(2), pages 252-277, April.
    13. Cheng Hsiao & M. Hashem Pesaran & Andreas Pick, 2012. "Diagnostic Tests of Cross‐section Independence for Limited Dependent Variable Panel Data Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 253-277, April.
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    More about this item

    Keywords

    cross-sectional correlation test; serial correlation; large panel data model;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C - Mathematical and Quantitative Methods
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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