Heteroskedasticity in Fixed-Effects One-Way Error Component Models: Evaluating the Performance of Standard Tests
28 Pages Posted: 2 Mar 2009 Last revised: 7 Jun 2012
Date Written: September 1, 2008
This paper evaluates the performance of the Breusch-Pagan LM test and the White test for heteroskedasticity in fixed-effects one-way error components models. It contrasts the behavior of these tests under the fixed-effects model with the first differences model for different variance functional forms, degrees of heteroskedasticity and sample sizes. Monte Carlo results indicate both tests perform equally well in large samples. They are very sensitive to overall sample size, as changes in T or N do not affect the performance if overall sample size is held constant. The White test seems to be more reliable for identifying heteroskedasticity than the Breusch-Pagan test, even if we are able to identify the actual functional form of the variance. The performance of either test in small samples is poor.
Keywords: Heteroskedasticity, Fixed-Effects, Panel Error Component Models
JEL Classification: C12, C23
Suggested Citation: Suggested Citation