Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence

57 Pages Posted: 1 Jun 2002

See all articles by Peter C. B. Phillips

Peter C. B. Phillips

University of Auckland Business School; Yale University - Cowles Foundation; Singapore Management University - School of Economics

Donggyu Sul


Date Written: May 2002


This paper deals with cross section dependence, homogeneity restrictions and small sample bias issues in dynamic panel regressions. To address the bias problem we develop a panel approach to median unbiased estimation that takes account of cross section dependence. The new estimators given here considerably reduce the effects of bias and gain precision from estimating cross section error correlation. The paper also develops an asymptotic theory for tests of coefficient homogeneity under cross section dependence, and proposes a modified Hausman test to test for the presence of homogeneous unit roots. An orthogonalization procedure is developed to remove cross section dependence and permit the use of conventional and meta unit root tests with panel data. Some simulations investigating the finite sample performance of the estimation and test procedures are reported.

Keywords: Autoregression, Bias, Cross Section Dependence, Dynamic Factors, Dynamic Panel Estimation, GLS Estimation, Homogeneity Tests, Median Unbiased Estimation, Modified Hausman Tests, Median Unbiased SUR Estimation, Orothogonalization Procedure, Panel Unit Root Test

JEL Classification: C32, C33

Suggested Citation

Phillips, Peter C. B. and Sul, Donggyu, Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence (May 2002). Available at SSRN: https://ssrn.com/abstract=311501

Peter C. B. Phillips (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand
+64 9 373 7599 x7596 (Phone)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3695 (Phone)
203-432-5429 (Fax)

Singapore Management University - School of Economics

90 Stamford Road

Donggyu Sul