A Robust Approach to Heteroskedasticity, Error Serial Correlation and Slope Heterogeneity for Large Linear Panel Data Models with Interactive Effects

ISER DP No. 1037

62 Pages Posted: 7 Aug 2018 Last revised: 28 Jun 2019

See all articles by Guowei Cui

Guowei Cui

Huazhong University of Science and Technology (Formerly Tongi Medical University)

Kazuhiko Hayakawa

Hiroshima University

Shuichi Nagata

Kwansei Gakuin University - School of Business Administration; Kwansei Gakuin University - Department of Mathematical Sciences

Takashi Yamagata

University of York - Department of Economics and Related Studies; Osaka University - Institute of Social and Economic Research

Date Written: June 26, 2019

Abstract

In this paper, we propose a robust approach against heteroskedasticity, error serial correlation and slope heterogeneity for large linear panel data models. First, we establish the asymptotic validity of the Wald test based on the widely used panel heteroskedasticity and autocorrelation consistent (HAC) variance estimator of the pooled estimator under random coefficient models. Then, we show that a similar result holds with the proposed bias-corrected Bai's (2009) estimator for models with unobserved interactive effects. Our new theoretical result justifies the use of the same slope estimator and the variance estimator, both for slope homogeneous and heterogeneous models. This robust approach can significantly reduce the model selection uncertainty for applied researchers. In addition, we propose a novel test for the correlation and dependence of the random coefficient with covariates. The test is of great importance, since the widely used estimators and/or its variance estimators can become inconsistent when the variation of coefficients depends on
covariates, in general. The finite sample evidence supports the usefulness and reliability of
our approach.

Keywords: panel data, slope heterogeneity, interactive e¤ects, test for correlated random coefficients

JEL Classification: C12, C13, C23

Suggested Citation

cui, guowei and Hayakawa, Kazuhiko and Nagata, Shuichi and Yamagata, Takashi, A Robust Approach to Heteroskedasticity, Error Serial Correlation and Slope Heterogeneity for Large Linear Panel Data Models with Interactive Effects (June 26, 2019). ISER DP No. 1037, Available at SSRN: https://ssrn.com/abstract=3215661 or http://dx.doi.org/10.2139/ssrn.3215661

Guowei Cui

Huazhong University of Science and Technology (Formerly Tongi Medical University) ( email )

Wuhan, Hubei 430074
China
18171270610 (Phone)

Kazuhiko Hayakawa

Hiroshima University ( email )

Japan

Shuichi Nagata

Kwansei Gakuin University - School of Business Administration ( email )

1-155 Uegahara-1bancho
Nishinomiya, Hyogo 662-8501
Japan

Kwansei Gakuin University - Department of Mathematical Sciences ( email )

Japan

Takashi Yamagata (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Osaka University - Institute of Social and Economic Research ( email )

6-1, Mihogaoka
Suita, Osaka 567-0047
Japan

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