General Diagnostic Tests for Cross Section Dependence in Panels

Mohammad Pesaran

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

Abstract: This paper proposes simple tests of error cross section dependence which are applicable to a variety of panel data models, including stationary and unit root dynamic heterogeneous panels with short T and large N. The proposed tests are based on average of pair-wise correlation coefficients of the OLS residuals from the individual regressions in the panel, and can be used to test for cross section dependence of any fixed order p, as well as the case where no a priori ordering of the cross section units is assumed, referred to a CD(p) and CD tests, respectively. Asymptotic distribution of these tests are derived and their power function analysed under different alternatives. It is shown that these test are correctly centred for fixed N and T, and are robust to single or multiple breaks in the slope coefficients and/or error variances. The small sample properties of the tests have the correct size in very small samples and satisfactory power, and as predicted by the theory, quite robust to the presence of unit roots and structural breaks. The use of the CD test is illustrated by applying it to study the degree of dependence in per capital output innovations across countries within a given region and across countries in different regions. The results show significant evidence of cross dependence in output innovations across many countries and regions of the world.

Keywords: cross section dependence; spatial dependence; diagnostic tests; dynamic heterogeneous panels; empirical growth (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 (search for similar items in EconPapers)
Pages: 50
Date: 2004-06
New Economics Papers: this item is included in nep-ecm
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1841)

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https://files.econ.cam.ac.uk/repec/cam/pdf/cwpe0435.pdf (application/pdf)

Related works:
Journal Article: General diagnostic tests for cross-sectional dependence in panels (2021)
Working Paper: General Diagnostic Tests for Cross Section Dependence in Panels (2004)
Working Paper: General Diagnostic Tests for Cross Section Dependence in Panels (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0435

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