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Inference and testing breaks in large dynamic panels with strong cross sectional dependence

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  • Hidalgo, Javier
  • Schafgans, Marcia

Abstract

In this paper we provide a new Central Limit Theorem for estimators of the slope papers in large dynamic panel data models (where both n and T increase without bound) in the presence of, possibly, strong cross-sectional dependence. We proceed by providing two related tests for breaks/homogeneity in the time dimension. The first test is based on the CUSUM principle; the second test is based on a Hausman–Durbin–Wu approach. Some of the key features of the tests are that they have nontrivial power when the number of individuals, for which the slope parameters may differ, is a “negligible” fraction or when the break happens to be towards the end of the sample, and do not suffer from the incidental parameter problem. We provide a simple bootstrap algorithm to obtain (asymptotic) valid critical values for our statistics. An important feature of the bootstrap is that there is no need to know the underlying model of the cross-sectional dependence. A Monte-Carlo simulation analysis sheds some light on the small sample behaviour of the tests and their bootstrap analogues. We implement our test to some real economic data.

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  • 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.
    • Handle: RePEc:eee:econom:v:196:y:2017:i:2:p:259-274
    DOI: 10.1016/j.jeconom.2016.09.008
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    2. J. Hidalgo & M. Schafgans, 2020. "Inference without smoothing for large panels with cross-sectional and temporal dependence," Papers 2006.14409, arXiv.org.
    3. Hidalgo, Javier & Schafgans, Marcia, 2021. "Inference without smoothing for large panels with cross-sectional and temporal dependence," LSE Research Online Documents on Economics 107426, London School of Economics and Political Science, LSE Library.
    4. Yiannis Karavias & Paresh Kumar Narayan & Joakim Westerlund, 2023. "Structural Breaks in Interactive Effects Panels and the Stock Market Reaction to COVID-19," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 41(3), pages 653-666, July.
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    7. Jiang, Peiyun & Kurozumi, Eiji, 2021. "A new test for common breaks in heterogeneous panel data models," Discussion paper series HIAS-E-107, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    8. 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.
    9. Javier Hidalgo & Marcia M Schafgans, 2017. "Inference Without Smoothing for Large Panels with Cross- Sectional and Temporal Dependence," STICERD - Econometrics Paper Series 597, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    More about this item

    Keywords

    Large dynamic panel data models; Cross-sectional strong-dependence; Central limit theorems; Homogeneity; Bootstrap algorithms;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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