Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation
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...
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doaj-2d4deef67bf446d19a24a397a45f9ca62020-11-25T00:14:24ZengMDPI AGEconometrics2225-11462016-11-01444410.3390/econometrics4040044econometrics4040044Testing Cross-Sectional Correlation in Large Panel Data Models with Serial CorrelationBadi H. Baltagi0Chihwa Kao1Bin Peng2Department of Economics & Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY 13244-1020, USADepartment of Economics, 365 Fairfield Way, U-1063, University of Connecticut, Storrs, CT 06269-1063, USADepartment of Finance, 523 School of Economics, Huazhong University of Science and Technology, Wuhan 430074, ChinaThis 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 Cross-sectional Dependence (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.http://www.mdpi.com/2225-1146/4/4/44cross-sectional correlation testserial correlationlarge panel data model |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Badi H. Baltagi Chihwa Kao Bin Peng |
spellingShingle |
Badi H. Baltagi Chihwa Kao Bin Peng Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation Econometrics cross-sectional correlation test serial correlation large panel data model |
author_facet |
Badi H. Baltagi Chihwa Kao Bin Peng |
author_sort |
Badi H. Baltagi |
title |
Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation |
title_short |
Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation |
title_full |
Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation |
title_fullStr |
Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation |
title_full_unstemmed |
Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation |
title_sort |
testing cross-sectional correlation in large panel data models with serial correlation |
publisher |
MDPI AG |
series |
Econometrics |
issn |
2225-1146 |
publishDate |
2016-11-01 |
description |
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 Cross-sectional Dependence (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. |
topic |
cross-sectional correlation test serial correlation large panel data model |
url |
http://www.mdpi.com/2225-1146/4/4/44 |
work_keys_str_mv |
AT badihbaltagi testingcrosssectionalcorrelationinlargepaneldatamodelswithserialcorrelation AT chihwakao testingcrosssectionalcorrelationinlargepaneldatamodelswithserialcorrelation AT binpeng testingcrosssectionalcorrelationinlargepaneldatamodelswithserialcorrelation |
_version_ |
1725390755048980480 |