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Title:Testing weak cross-sectional dependence in large panels PDF Logo
Authors:Pesaran, Hashem
Issue Date:2012
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6432
Abstract: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 α, 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 < ϵ ≤ 1, then the implicit null of the CD test is given by 0 ≤ α < (2 - ϵ )/4, which gives 0 ≤ α < 1/4, when N and T tend to infinity at the same rate such that T/N → к, with к ; 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 α 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
Persistent Identifier of the first edition:urn:nbn:de:101:1-201207125658
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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