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The Incidental Parameters Problem in Testing for Remaining Cross-Section Correlation

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In this article, we consider the properties of the Pesaran CD test for cross-section correlation when applied to residuals obtained from panel data models with many estimated parameters. We show that the presence of period-specific parameters leads the CD test statistic to diverge as the time dimension of the sample grows. This result holds even if cross-section dependence is correctly accounted for and hence constitutes an example of the incidental parameters problem. The relevance of this problem is investigated for both the classical two-way fixed-effects estimator and the Common Correlated Effects estimator of Pesaran. We suggest a weighted CD test statistic which re-establishes standard normal inference under the null hypothesis. Given the widespread use of the CD test statistic to test for remaining cross-section correlation, our results have far reaching implications for empirical researchers.

Ketersediaan

Informasi Detail

Judul Seri

JOURNAL OF BUSINESS AND ECONOMIC STATISTICS; Vol.40 No.3 July 2022

No. Panggil

-

Penerbit

: .,

Deskripsi Fisik

p. 1191-1203

Bahasa

English

ISBN/ISSN

-

Klasifikasi

NONE

Tipe Isi

-

Tipe Media

-

Tipe Pembawa

-

Edisi

-

Subjek

PANEL DATA
FACTOR MODEL
CROSS-SECTION DEPENDENCE
U-STATISTIC
TIME FIXED EFFECTS

Info Detail Spesifik

https://doi.org/10.1080/07350015.2021.1906687

Pernyataan Tanggungjawab

Arturas Juodis, Simon Reese

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