Abstract

http://ssrn.com/abstract=2002489
 
 

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Diagnostic Tests of Cross‐Section Independence for Limited Dependent Variable Panel Data Models*


Cheng Hsiao


University of Southern California - Department of Economics; National Taiwan University; National Bureau of Economic Research (NBER)

M. Hashem Hashem Pesaran


University of Southern California

Andreas Pick


Erasmus University Rotterdam (EUR) - Department of Econometrics; De Nederlandsche Bank

April 2012

Oxford Bulletin of Economics and Statistics, Vol. 74, Issue 2, pp. 253-277, 2012

Abstract:     
This article considers the problem of testing for cross‐section independence in limited dependent variable panel data models. It derives a Lagrangian multiplier (LM) test and shows that in terms of generalized residuals of Gourieroux et al. (1987) it reduces to the LM test of Breusch and Pagan (1980). Because of the tendency of the LM test to over‐reject in panels with large N (cross‐section dimension), we also consider the application of the cross‐section dependence test (CD) proposed by Pesaran (2004). In Monte Carlo experiments it emerges that for most combinations of N and T the CD test is correctly sized, whereas the validity of the LM test requires T (time series dimension) to be quite large relative to N. We illustrate the cross‐sectional independence tests with an application to a probit panel data model of roll‐call votes in the US Congress and find that the votes display a significant degree of cross‐section dependence.

Number of Pages in PDF File: 25

JEL Classification: C12, C33, C35

Accepted Paper Series





Date posted: February 10, 2012  

Suggested Citation

Hsiao, Cheng and Pesaran, M. Hashem Hashem and Pick, Andreas, Diagnostic Tests of Cross‐Section Independence for Limited Dependent Variable Panel Data Models* (April 2012). Oxford Bulletin of Economics and Statistics, Vol. 74, Issue 2, pp. 253-277, 2012. Available at SSRN: http://ssrn.com/abstract=2002489 or http://dx.doi.org/10.1111/j.1468-0084.2011.00646.x

Contact Information

Cheng Hsiao (Contact Author)
University of Southern California - Department of Economics ( email )
3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
National Taiwan University
1 Sec. 4, Roosevelt Road,
Taipei, 106
Taiwan
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
M. Hashem Hashem Pesaran
University of Southern California ( email )
Los Angeles, CA 90089
United States
Andreas Pick
Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )
P.O. Box 1738
3000 DR Rotterdam
Netherlands
De Nederlandsche Bank ( email )
PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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