Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models

25 Pages Posted: 26 Apr 2007

See all articles by Cheng Hsiao

Cheng Hsiao

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

M. Hashem Pesaran

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

Andreas Pick

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

Date Written: May 2007

Abstract

In this paper we discuss tests for residual cross section dependence in nonlinear panel data models. The tests are based on average pair-wise residual correlation coefficients. In nonlinear models, the definition of the residual is ambiguous and we consider two approaches: deviations of the observed dependent variable from its expected value and generalized residuals. We show the asymptotic consistency of the cross section dependence (CD) test of Pesaran (2004). In Monte Carlo experiments it emerges that the CD test has the correct size for any combination of N and T whereas the LM test relies on T large relative to N. We then analyze the roll-call votes of the 104th U.S. Congress and find considerable dependence between the votes of the members of Congress.

Keywords: cross-section dependence, nonlinear panel data model

JEL Classification: C12, C33, C35

Suggested Citation

Hsiao, Cheng and Pesaran, M. Hashem and Pick, Andreas, Diagnostic Tests of Cross Section Independence for Nonlinear Panel Data Models (May 2007). IZA Discussion Paper No. 2756, CESifo Working Paper Series No. 1984, IEPR Working Paper No. 07.17, Available at SSRN: https://ssrn.com/abstract=982629 or http://dx.doi.org/10.2139/ssrn.982629

Cheng Hsiao

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 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

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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