Testing Slope Homogeneity in Large Panels

46 Pages Posted: 8 Mar 2005

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Takashi Yamagata

University of Cambridge - Faculty of Economics and Politics

Date Written: March 2005

Abstract

This paper proposes a modified version of Swamy's test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T). The proposed test exploits the cross section dispersion of individual slopes weighted by their relative precision. In the case of models with strictly exogenous regressors and normally distributed errors, the test is shown to have a standard normal distribution. Using Monte Carlo experiments, it is shown that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T. For autoregressive (AR) models the proposed test performs well for moderate values of the root of the autoregressive process. But for AR models with roots near unity a bias-corrected bootstrapped version of the test is proposed which performs well even if N is large relative to T. The proposed cross section dispersion tests are applied to testing the homogeneity of slopes in autoregressive models of individual earnings using the PSID data. The results show statistically significant evidence of slope heterogeneity in the earnings dynamics, even when individuals with similar educational backgrounds are considered as sub-sets.

Keywords: Testing Slope Homogeneity, Hausman Type Tests, Cross Section ispersion Tests, Monte Carlo Results, PSID Earnings Dynamics

JEL Classification: C12, C33

Suggested Citation

Pesaran, M. Hashem and Yamagata, Takashi, Testing Slope Homogeneity in Large Panels (March 2005). Available at SSRN: https://ssrn.com/abstract=671050

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Takashi Yamagata

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

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