General Diagnostic Tests for Cross Section Dependence in Panels
Mohammad Pesaran
No 1240, IZA Discussion Papers from Institute of Labor Economics (IZA)
Abstract:
This paper proposes simple tests of error cross section dependence which are applicable to a variety of panel data models, including stationary and unit root dynamic heterogeneous panels with short T and large N. The proposed tests are based on average of pair-wise correlation coefficients of the OLS residuals from the individual regressions in the panel, and can be used to test for cross section dependence of any fixed order p, as well as the case where no a priori ordering of the cross section units is assumed, referred to as CD(p) and CD tests, respectively. Asymptotic distributions of these tests are derived and their power function analyzed under different alternatives. It is shown that these tests are correctly centred for fixed N and T, and are robust to single or multiple breaks in the slope coefficients and/or error variances. The small sample properties of the tests are investigated and compared to the Lagrange multiplier test of Breusch and Pagan using Monte Carlo experiments. It is shown that the tests have the correct size in very small samples and satisfactory power, and as predicted by the theory, quite robust to the presence of unit roots and structural breaks. The use of the CD test is illustrated by applying it to study the degree of dependence in per capita output innovations across countries within a given region and across countries in different regions. The results show significant evidence of cross dependence in output innovations across many countries and regions in the world.
Keywords: dynamic heterogenous panels; diagnostic tests; spatial dependence; cross section dependence; empirical growth (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2004-08
References: Add references at CitEc
Citations: View citations in EconPapers (3427)
Published - published in: Empirical Economics, 2021, 60, 13–50
Downloads: (external link)
https://docs.iza.org/dp1240.pdf (application/pdf)
Related works:
Journal Article: General diagnostic tests for cross-sectional dependence in panels (2021)
Working Paper: General Diagnostic Tests for Cross Section Dependence in Panels (2004)
Working Paper: General Diagnostic Tests for Cross Section Dependence in Panels (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp1240
Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Access Statistics for this paper
More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().