Description/Abstract
It is well known that the standard Breusch and Pagan (1980) LM test for cross-equation correlation in a SUR model is not appropriate for testing cross-sectional dependence in panel data models when the number of cross-sectional units (n) is large and the number of time periods (T) is small. In fact, a scaled version of this LM test was proposed by Pesaran (2004) and its finite sample bias was corrected by Pesaran, Ullah and Yamagata (2008). This was done in the context of a heterogeneous panel data model. This paper derives the asymptotic bias of this scaled version of the LM test in the context of a fixed effects homogeneous panel data model. This asymptotic bias is found to be a constant related to n and T, which suggests a simple bias corrected LM test for the null hypothesis. Additionally, the paper carries out some Monte Carlo experiments to compare the finite sample properties of this proposed test with existing tests for cross-sectional dependence.
Document Type
Working Paper
Date
5-2012
Keywords
LM Test, Cross-sectional Dependence, Fixed Effects, High Dimensional Inference
Series
Working Papers Series
Disciplines
Economics | Public Affairs, Public Policy and Public Administration
Recommended Citation
Baltagi, Badi; Feng, Qu; and Kao, Chihwa, "A Lagrange Multiplier Test for Cross-Sectional Dependence in a Fixed Effects Panel Data Model" (2012). Center for Policy Research. 193.
https://surface.syr.edu/cpr/193
Source
local input
Creative Commons License
This work is licensed under a Creative Commons Attribution 3.0 License.
Additional Information
Working paper no. 137