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A heteroskedasticity robust test for cross-sectional correlation in a fixed effects panel data model

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  • Peng, Bin
  • Yu, Junqi
  • Zhu, Yi

Abstract

This paper proposes a new test for detecting no cross-sectional correlation in a fixed effects panel data model. The newly proposed test is allowing for the heteroscedastic variances across time. It shows that if the error terms have zero skewness, the new test converges to a standard normal distribution as (n,T)→∞ with n∕T→c∈(0,∞); if the skewness of the error terms is nonzero and finite, the test converges to a standard normal distribution as (n,T)→∞ with n2∕T→0. Besides, the paper conducts Monte Carlo simulations for studying the finite sample properties, and the results verify our theoretical findings.

Suggested Citation

  • Peng, Bin & Yu, Junqi & Zhu, Yi, 2021. "A heteroskedasticity robust test for cross-sectional correlation in a fixed effects panel data model," Economics Letters, Elsevier, vol. 201(C).
    • Handle: RePEc:eee:ecolet:v:201:y:2021:i:c:s0165176521000768
    DOI: 10.1016/j.econlet.2021.109799
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    References listed on IDEAS

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    1. 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.
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    3. M. Hashem Pesaran & Aman Ullah & Takashi Yamagata, 2008. "A bias-adjusted LM test of error cross-section independence," Econometrics Journal, Royal Economic Society, vol. 11(1), pages 105-127, March.
    4. Badi H. Baltagi & Chihwa Kao & Bin Peng, 2016. "Testing Cross-Sectional Correlation in Large Panel Data Models with Serial Correlation," Econometrics, MDPI, vol. 4(4), pages 1-24, November.
    5. M. Hashem Pesaran, 2021. "General diagnostic tests for cross-sectional dependence in panels," Empirical Economics, Springer, vol. 60(1), pages 13-50, January.
    6. Guangyu Mao, 2016. "Testing for error cross‐sectional independence using pairwise augmented regressions," Econometrics Journal, Royal Economic Society, vol. 19(3), pages 237-260, October.
    7. Halunga, Andreea G. & Orme, Chris D. & Yamagata, Takashi, 2017. "A heteroskedasticity robust Breusch–Pagan test for Contemporaneous correlation in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 198(2), pages 209-230.
    8. 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.
    9. Matei Demetrescu & Ulrich Homm, 2016. "Directed Tests of No Cross‐Sectional Correlation in Large‐N Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(1), pages 4-31, January.
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