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Testing Panel Data Regression Models with Spatial Error Correlation

Badi Baltagi (), Seuck Heun Song () and Won Koh ()
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Seuck Heun Song: Department of Statistics, Korea University, Postal: Department of Statistics, Korea University, Sungbuk-Ku, Seoul, 136-701, Korea
Won Koh: Department of Statistics, Korea University, Postal: Department of Statistics, Korea University, Sungbuk-Ku, Seoul, 136-701, Korea

No B6-4, 10th International Conference on Panel Data, Berlin, July 5-6, 2002 from International Conferences on Panel Data

Abstract: This paper derives several Lagrange Multiplier tests for the panel data regression model with spatial error correlation. These tests draw upon two strands of earlier work. The first is the LM tests for the spatial error correlation model discussed in Anselin (1988, 1999) and Anselin, Bera, Florax and Yoon (1996), and the second is the LM tests for the error component panel data model discussed in Breusch and Pagan (1980) and Baltagi, Chang and Li (1992). The idea is to allow for both spatial error correlation as well as random region effects in the panel data regression model and to test for their joint significance. Additionally, this paper derives conditional LMtests, which test for random regional effects given the presence of spatial error correlation. Also, spatial error correlation given the presence of random regional effects. These conditional LM tests are an alternative to the one directional LM tests that test for random regional effects ignoring the presence of spatial error correlation or the one directional LM tests for spatial error correlation ignoring the presence of random regional effects. We argue that these joint and conditional LM tests guard against possible misspecification. Extensive Monte Carlo experiments are conducted to study the performance of these LM tests as well as the corresponding Likelihood Ratio tests.

Keywords: Panel data; Spatial error correlation, Lagrange Multiplier tests, Likelihood Ratio tests (search for similar items in EconPapers)
JEL-codes: C23 C12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2002-03
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