A test of cross section dependence for a linear dynamic panel model with regressors

Question

1. What have the authors contributed in "A test of cross section dependence for a linear dynamic panel model with regressors" ?

2. What is the purpose of the overidentifying restrictions test?

3. What is the problem of the CD test?

4. What is the significance of the proposed tests?

Accepted Answer

This paper proposes a new testing procedure for detecting error cross section dependence after estimating a linear dynamic panel data model with regressors using the generalised method of moments ( GMM ).. Importantly, their approach allows one to examine whether any error cross section dependence remains after including time dummies ( or after transforming the data in terms of deviations from time-speci c averages ), which will be the case under heterogeneous error cross section dependence.. The authors would like to thank Tom Flavin, Hashem Pesaran and Neville Weber for helpful discussions.. Finite sample simulation-based results suggest that their tests perform well, particularly the version based on the Blundell and Bond ( 1998 ) system GMM estimator.

Accepted Answer

The overidentifying restrictions test can be regarded as a misspeci cation test, in a sense that it is designed to detect violations of moment conditions, which are the heart of GMM methods.

Accepted Answer

as Frees (1995) implied and Pesaran (2004) pointed out, the problem of the CD test is that in a stationary dynamic panel data model it will fail to reject the null of error cross section independence when the factor loadings have zero mean in the cross-sectional dimension.

Accepted Answer

The proposed tests are applied to employment equations using UK rm data, and the results show little evidence of heterogeneous error cross section dependence.

Accepted Answer

SY S1 and SY S2 are the one-step and two-step SYS estimators respectively, and they are based on the full set of moment conditions The authorand II in Proposition 8, and SY SX1 and SY SX2 denote the one-step and two-step SYS estimators based only on the subset of moment conditions II .

Accepted Answer

Recently Pesaran (2004) proposed another test for cross section dependence, called CD test, which allows for a exible model structure, including fairly general heterogeneous dynamic models and nonstationary models.

Accepted Answer

Recently Bowsher (2002) reports nite sample evidence that Sargan s overidentifying restrictions test exploiting all moment conditions available can reject the null hypothesis too infrequently in linear dynamic panel models.

Accepted Answer

Since their focus is on the performance of the tests and estimators, the authors pay careful attention to the main factors that a¤ect it namely, (i) the signal-to-noise ratio, (ii) the relative importance of the variance of the factor loadings and the idiosyncratic errors, and (iii) the impact of the ratio between the variance of the individual-speci c e¤ects and the variance of the idiosyncractic error and factor loadings on yit.

Accepted Answer

The third approach is to use Sargan s (1988) di¤erence test, which the authors are adopting, since it is relatively easier to compute than the Newey s test statistic, and furthermore, they are asymptotically equivalent.

Accepted Answer

As the degree of error cross section dependence rises, the bias of the GMM estimators based on the full set of moment conditions increases, which is expected as only those estimators based on Moment Conditions II or II are consistent.

Accepted Answer

It follows that the CD test will have poor power properties when it is applied to a regression with time dummies or on cross-sectionally demeaned data.

A test of cross section dependence for a linear dynamic panel model with regressors

Chat with Paper

AI Agents for this Paper

Most frequently asked questions

1. What have the authors contributed in "A test of cross section dependence for a linear dynamic panel model with regressors" ?

2. What is the purpose of the overidentifying restrictions test?

3. What is the problem of the CD test?

4. What is the significance of the proposed tests?

5. What are the two step and one-step SYS estimators?

6. What is the test for cross section dependence?

7. How does Bowsher (2002) find the null hypothesis?

8. what is the effect of the factor loadings on yit?

9. What is the third approach to the test?

10. What is the difference between the two GMM estimators?

11. What is the problem with the CD test?

Figures

Citations

General Diagnostic Tests for Cross Section Dependence in Panels

Testing Weak Cross-Sectional Dependence in Large Panels

Testing Weak Cross-Sectional Dependence in Large Panels

Testing for cross-sectional dependence in panel-data models

A Lagrange Multiplier Test for Cross-Sectional Dependence in a Fixed Effects Panel Data Model

References

Asymptotic Distributions of Quasi-Maximum Likelihood Estimators for Spatial Autoregressive Models

A PANIC Attack on Unit Roots and Cointegration

Testing for a unit root in panels with dynamic factors

Panel data models with spatially correlated error components

Assessing cross-sectional correlation in panel data

Related Papers (5)

Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.

Initial conditions and moment restrictions in dynamic panel data models

Another look at the instrumental variable estimation of error-components models

How to do xtabond2: An introduction to difference and system GMM in Stata

The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics