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Title:Exponent of cross-sectional dependence: Estimation and inference PDF Logo
Authors:Bailey, Natalia
Kapetanios, George
Pesaran, Hashem
Issue Date:2012
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6318
Abstract:An important issue in the analysis of cross-sectional dependence which has received renewed interest in the past few years is the need for a better understanding of the extent and nature of such cross dependencies. In this paper we focus on measures of cross-sectional dependence and how such measures are related to the behaviour of the aggregates defined as cross-sectional averages. We endeavour to determine the rate at which the cross-sectional weighted average of a set of variables appropriately demeaned, tends to zero. One parameterisation sets this to be O(Nα-2), for 1/2 < α ≤ 1. Given the fashion in which it arises, we refer to as the exponent of cross-sectional dependence. We derive an estimator of from the estimated variance of the cross-sectional average of the variables under consideration. We propose bias corrected estimators, derive their asymptotic properties and consider a number of extensions. We include a detailed Monte Carlo study supporting the theoretical results. Finally, we undertake an empirical investigation of using the S&P 500 data-set, and a large number of macroeconomic variables across and within countries.
Subjects:cross correlations
cross-sectional dependence
cross-sectional averages
weak and strong factor models
Capital Asset Pricing Model
JEL:C21
C32
Persistent Identifier of the first edition:urn:nbn:de:101:1-2012042310152
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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