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Testing for Serial Correlation in Fixed-Effects Panel Data Models

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  • Benjamin Born
  • Jörg Breitung

Abstract

In this article, we propose various tests for serial correlation in fixed-effects panel data regression models with a small number of time periods. First, a simplified version of the test suggested by Wooldridge (2002) and Drukker (2003) is considered. The second test is based on the Lagrange Multiplier (LM) statistic suggested by Baltagi and Li (1995), and the third test is a modification of the classical Durbin--Watson statistic. Under the null hypothesis of no serial correlation, all tests possess a standard normal limiting distribution as N tends to infinity and T is fixed. Analyzing the local power of the tests, we find that the LM statistic has superior power properties. Furthermore, a generalization to test for autocorrelation up to some given lag order and a test statistic that is robust against time dependent heteroskedasticity are proposed.

Suggested Citation

  • Benjamin Born & Jörg Breitung, 2016. "Testing for Serial Correlation in Fixed-Effects Panel Data Models," Econometric Reviews, Taylor & Francis Journals, vol. 35(7), pages 1290-1316, August.
    • Handle: RePEc:taf:emetrv:v:35:y:2016:i:7:p:1290-1316
    DOI: 10.1080/07474938.2014.976524
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    References listed on IDEAS

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    1. A. Bhargava & L. Franzini & W. Narendranathan, 2006. "Serial Correlation and the Fixed Effects Model," World Scientific Book Chapters, in: Econometrics, Statistics And Computational Approaches In Food And Health Sciences, chapter 4, pages 61-77, World Scientific Publishing Co. Pte. Ltd..
    2. Baltagi, Badi H. & Li, Qi, 1995. "Testing AR(1) against MA(1) disturbances in an error component model," Journal of Econometrics, Elsevier, vol. 68(1), pages 133-151, July.
    3. Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, vol. 11(3), pages 277-280, March.
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