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Testing for Serial Correlation, Spatial Autocorrelation and Random Effects

Won Koh, Byoung Cheol Jung, Badi Baltagi () and Seuck Heun Song

No 338, Econometric Society 2004 Australasian Meetings from Econometric Society

Abstract: This paper considers a spatial panel data regression model with serial correlation on each spatial unit over time as well as spatial dependence between the spatial units at each point in time. In addition, the model allows for heterogeneity across the spatial units using random effects. The paper then derives several Lagrange Multiplier tests for this panel data regression model including a joint test for serial correlation, spatial autocorrelation and random effects. These tests draw upon two strands of earlier work. The first is the LM tests for the spatial error correlation model discussed in Anselin and Bera (1998) and in the panel data context by Baltagi, Song and Koh (2003). The second is the LM tests for the error component panel data model with serial correlation derived by Baltagi and Li (1995). Hence the joint LM test derived in this paper encompasses those derived in both strands of earlier works. In fact, in the context of our general model, the earlier LM tests become marginal LM tests that ignore either serial correlation over time or spatial error correlation. The paper then derives conditional LM and LR tests that do not ignore these correlations and contrast them with their marginal LM and LR counterparts. The small sample performance of these tests is investigated using Monte Carlo experiments. As expected, ignoring any correlation when it is significant can lead to misleading inference

Keywords: panel data; spatial correlation (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 and nep-ets
Date: 2004-08-11
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