published in: Econometric Reviews, 2015, 34 (6-10), 1089-1117
This paper considers testing the hypothesis that errors in a panel data model are weakly cross sectionally dependent, using the exponent of cross-sectional dependence ?, introduced recently in Bailey, Kapetanios and Pesaran (2012). It is shown that the implicit null of the CD test depends on the relative expansion rates of N and T. When T=O(N^?), for some 0 < ? ? 1, then the implicit null of the CD test is given by 0 ? ? < (2–?)/4, which gives 0 ? ? < 1/4, when N and T tend to infinity at the same rate such that T/N ? ?, with ?; with being a finite positive constant. It is argued that in the case of large N panels, the null of weak dependence is more appropriate than the null of independence which could be quite restrictive for large panels. Using Monte Carlo experiments, it is shown that the CD test has the correct size for values of ? in the range [0, 1/4], for all combinations of N and T, and irrespective of whether the panel contains lagged values of the dependent variables, so long as there are no major asymmetries in the error distribution.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.