Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/57947 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 3800
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper considers testing the hypothesis that errors in a panel data model are weakly Cross-sectionally dependent (CD), 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. 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 the cross-sectional exponent that lie 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.
Subjects: 
exponent of cross-sectional dependence
diagnostic tests
panel data models
dynamic heterogenous panels
JEL: 
C12
C13
C33
Document Type: 
Working Paper
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