Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/185421
Authors: 
Bailey, Natalia
Kapetanios, George
Pesaran, M. Hashem
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper 7223
Abstract: 
In this paper we focus on estimating the degree of cross-sectional dependence in the error terms of a classical panel data regression model. For this purpose we propose an estimator of the exponent of cross-sectional dependence denoted by α; which is based on the number of non-zero pair-wise cross correlations of these errors. We prove that our estimator, ᾶ; is consistent and derive the rate at which ᾶ approaches its true value. We evaluate the finite sample properties of the proposed estimator by use of a Monte Carlo simulation study. The numerical results are encouraging and supportive of the theoretical findings. Finally, we undertake an empirical investigation of α for the errors of the CAPM model and its Fama-French extensions using 10-year rolling samples from S&P 500 securities over the period Sept 1989 - May 2018.
Subjects: 
pair-wise correlations
cross-sectional dependence
cross-sectional averages
weak and strong factor models
CAPM and Fama-French factors
JEL: 
C21
C32
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.