A Bias-Adjusted LM Test of Error Cross Section Independence

Mohammad Pesaran, Aman Ullah and Takashi Yamagata
Authors registered in the RePEc Author Service: Aman Ullah and Assad Ullah

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper proposes bias-adjusted normal approximation versions of Lagrange multiplier (NLM) test of error cross section independence of Breusch and Pagan (1980) in the case of panel models with strictly exogenous regressors and normal errors. The exact mean and variance of the Lagrange multiplier (LM) test statistic are provided for the purpose of the bias-adjustments, and it is shown that the proposed tests have a standard normal distribution for the fixed time series dimension (T) as the cross section dimension (N) tends to infinity. Importantly, the proposed bias-adjusted NLM tests are consistent even when the Pesaran’s (2004) CD test is inconsistent. The finite sample evidence shows that the bias adjusted NLM tests successfully control the size, maintaining satisfactory power. However, it is also shown that the bias-adjusted NLM tests are not as robust as the CD test to non-normal errors and/or in the presence of weakly exogenous regressors.

Keywords: Cross Section Dependence; Spatial Dependence; LM test; Panel Model; Bias-adjusted Test (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 (search for similar items in EconPapers)
Pages: 22
Date: 2006-05
New Economics Papers: this item is included in nep-ecm
Note: Ec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: A bias-adjusted LM test of error cross-section independence (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0641

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