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Specification testing with grouped fixed effects

Claudia Pigini, Alessandro Pionati and Francesco Valentini

MPRA Paper from University Library of Munich, Germany

Abstract: We propose a bootstrap generalized Hausman test for the correct specification of unobserved heterogeneity in fixed-effects panel data models. We consider as null hypotheses two scenarios in which the unobserved heterogeneity is either time-invariant or specified as additive individual and time effects. We contrast the standard fixed- effects estimators with the recently developed two-step grouped fixed-effects estimator, that is consistent in the presence of time-varying heterogeneity under minimal specification and distributional assumptions for the unobserved effects. The Hausman test exploits the general formulation for the variance of the vector of contrasts and critical values are computed via parametric percentile bootstrap, so as to account for the non-centrality of the asymptotic χ 2 distribution arising from the incidental parameters and approximation biases. Monte Carlo evidence shows that the test has correct size and good power in both linear and non linear specification.

Keywords: Additive effects; Asymptotic bias; Hausman test; Parametric bootstrap; Time-varying heterogeneity (search for similar items in EconPapers)
JEL-codes: C12 C23 C25 (search for similar items in EconPapers)
Date: 2023-07-04
New Economics Papers: this item is included in nep-dcm and nep-ecm
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https://mpra.ub.uni-muenchen.de/117821/1/GFEtest_072023.pdf original version (application/pdf)

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Working Paper: Specification testing with grouped fixed effects (2023) Downloads
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