Panel data, heteroskedasticity, serial correlation, Lagrange Multiplier tests, likelihood ratio, random effects
This paper considers a panel data regression model with heteroskedastic as well as serially correlated disturbances, and derives a joint LM test for homoskedasticity and no first order serial correlation. The restricted model is the standard random individual error component model. It also derives a conditional LM test for homoskedasticity given serial correlation, as well as a conditional LM test for no first order serial correlation given heteroskedasticity, all in the context of a random effects panel data model. Monte Carlo results show that these tests, along with their likelihood ratio alternatives, have good size and power under various forms of heteroskedasticity including exponential and quadratic functional forms.
Baltagi, Badi H.; Jung, Byoung Cheol; and Song, Seuck Heun, "Testing for Heteroskedasticity and Serial Correlation in a Random Effects Panel Data Model" (2008). Center for Policy Research. Paper 56.
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