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Testing for sphericity in a fixed effects panel data model with time-varying variances

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  • Peng, Bin
  • Shen, Xinyuan
  • Ye, Jinqi

Abstract

This paper proposes a test for the null of sphericity in a fixed effects panel data model with time-varying variances. We construct new test statistics using the within residuals from the fixed effects panel data regression model on the basis of Li and Yao’s (2018) test procedure. We show that the newly proposed test converges to a standard normal distribution as (n,T)→∞ with n∕T→c∈(0,∞). The power properties of the test are studied under both weak and strong factor model alternatives. Monte Carlo simulations are conducted to examine the finite sample performance.

Suggested Citation

  • Peng, Bin & Shen, Xinyuan & Ye, Jinqi, 2019. "Testing for sphericity in a fixed effects panel data model with time-varying variances," Economics Letters, Elsevier, vol. 181(C), pages 85-89.
    • Handle: RePEc:eee:ecolet:v:181:y:2019:i:c:p:85-89
    DOI: 10.1016/j.econlet.2019.05.012
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    References listed on IDEAS

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    1. 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(1), pages 25-47, February.
    2. Chen, Song Xi & Zhang, Li-Xin & Zhong, Ping-Shou, 2010. "Tests for High-Dimensional Covariance Matrices," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 810-819.
    3. Badi H. Baltagi & Chihwa Kao & Fa Wang, 2017. "Asymptotic power of the sphericity test under weak and strong factors in a fixed effects panel data model," Econometric Reviews, Taylor & Francis Journals, vol. 36(6-9), pages 853-882, October.
    4. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2011. "Weak and strong cross‐section dependence and estimation of large panels," Econometrics Journal, Royal Economic Society, vol. 14(1), pages 45-90, February.
    5. Guangyu Mao, 2018. "Testing for sphericity in a two-way error components panel data model," Econometric Reviews, Taylor & Francis Journals, vol. 37(5), pages 491-506, May.
    6. Alexei Onatski & Marcelo Moreira J. & Marc Hallin, 2011. "Asymptotic Power of Sphericity Tests for High-Dimensional Data," Working Papers ECARES ECARES 2011-018, ULB -- Universite Libre de Bruxelles.
    7. Mao, Guangyu, 2014. "A note on tests of sphericity and cross-sectional dependence for fixed effects panel model," Economics Letters, Elsevier, vol. 122(2), pages 215-219.
    8. Baltagi, Badi H. & Kao, Chihwa & Peng, Bin, 2015. "On testing for sphericity with non-normality in a fixed effects panel data model," Statistics & Probability Letters, Elsevier, vol. 98(C), pages 123-130.
    9. Weiming Li & Jianfeng Yao, 2018. "On structure testing for component covariance matrices of a high dimensional mixture," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 80(2), pages 293-318, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Sphericity test; Fixed effects; Panel data model; Time-varying variances;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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