Econometric Analysis of Panel Data

Hypothesis Testing
Specification Tests
Fixed Effects vs. Random Effects
Heteroscedasticity
Autocorrelation
Serial Autocorrelation
Spatial Autocorrelation
More on Autocorrelation

Hypothesis Testing
Heteroscedasticity


Serial Correlation


Spatial Correlation
2
' 2
2
, ( ) , ( )
it
i
i
e
it it i it i u it
e
y u e Var u Var e
o
o
o

= + + = =

x
1 '
1
,
it it
it it i it it
i it it
v e
y u v v
v e

= + + =

+

x
'
,
it it i it it ij jt it
j
y u v v w v e = + + = +

x
Hypothesis Testing
Heteroscedasticity


'
,
2 2 ' ' '
2 2 ' ' '
2 2 2 ' 2
2 2 2 2 '
( ) ( ), 1,..., ( . ., )
( ) ( ), 1,..., , 1,..., ( . ., )
( )
( ) ( )
i
it
i
it
it it it it i it
i u u u i u i i
it e e e it e it it
u e u u i u e
it u e u e e it e
u
y u e
Var u h i N e g
Var e h i N t T e g
h
Var h
c c
o o o
o o o
o o o o o
c o o o o o
o
= + = +
= = = =
= = = = =
+ = +
= + = +
x
f f x
z z x
f
z
2 2 2 ' '
( ) ( )
i it
e u u i u e it e
h h o o o o

+ = +

f z
' 2 2
2 2 2 '
2 2 2 2 2 '
: (.) 0, (0) 1, (0) 0, 0, 0
( ), 1,...,
( )
i i
i
u e
e e e e i e
u e u e e i e
Note h h h
A special case of is h i N
then h
c
o o
o o o o
o o o o o o
> = = > >
= =
= + = +
z
z
Hypothesis Testing
Test for Homoscedasticity
If o
u
2
=0 (constant effects or pooled model), then


LM Test (Breusch and Pagan, 1980)



'
2 2 ' 2 '
( ) ( ) ( )
it
it it i it
it e e e it e e e i e
y u e
Var e h or h o o o o o
= + +
= =
x
z z
2
' ' 1 ' 2
0
2 2 2 '
'
2 2 2
2 2 2
0
1
( 0) ( ) ~ (# )
2

/ 1, / ,
[ , 1,..., , 1,..., ]
(1) Regress [ / 1] on , obtain ~ (# )
2
(2) Regress , obtain ~ (# )
u
e e
e e
it
e e
e e
LM G Z Z Z Z G
G NT u
Z i N t T
ESS
Z
on Z NTR
o
o _ o
o o
o _ o
o o _ o

=
= =
= = =
= = =

+
e ee e y X
z
e
e
0
: 0
e
H o =
Hypothesis Testing
Test for Homoscedasticity
If o
u
2
>0 (random effects), then



LM Tests (Baltagi, Bresson, and Pirott, 2006)
'
2 2 '
2 2 ' 2 '
( ) ( )
( ) ( ) ( )
i
it
it it i it
i u u u i u
it e e e it e e e i e
y u e
Var u h
Var e h or h
o o o
o o o o o
= + +
= =
= =
x
f
z z
0
0
0
: 0 | 0
: 0 | 0
: 0, 0
e u
u e
u e
H
H
H
o o
o o
o o
= =
= =
= =
Hypothesis Testing
Test for Homoscedasticity
Marginal LM Test




See, Montes-Rojas and Sosa-Escudero (2011)



2 ' 2 2
0
'
' '

, ~ (# )

( . ., , )
it it e e
it i it it it
it it
Regress on obtain NTR
where u e y
e g not including constant
c o o _ o
c |
+
= + =
=
z
x
z x
2
0
: 0 | 0, 0
e u u
H o o o = = >
Hypothesis Testing
Test for Homoscedasticity
Marginal LM Test




Joint LM Test
Sum of the above two marginal test statistics
(approximately)
See, Montes-Rojas and Sosa-Escudero (2011)


2 ' 2 2
0
'
1
' '

, ~ (# )
1

,
( . ., )
i i u u
T
i it it i it it it
t
i i
Regress on obtain NR
where u e y
T
e g
c o o _ o
c c c |
=
+
= = + =
=

f
x
f x
2
0
: 0 | 0, 0
u e u
H o o o = = >
2
0
: 0, 0 | 0
u e u
H o o o = = >
Hypothesis Testing
Testing for Homoscedasticity
References
Batagi, B.H., G. Bresson, and A. Priotte, Joint LM Test for
Homoscedasticity in a One-Way Error Component
Model, Journal of Econometrics, 134, 2006, 401-417.
Breusch, T. and A. Pagan, A Simple Test of
Heteroscedasticity and Random Coefficient Variations,
Econometrica, 47, 1979, 1287-1294.
Montes-Rojas, G. and W. Sosa-Escudero, Robust Tests for
Heteroscedasticity in the One-Way Error Components
Model, Journal of Econometrics, 2011, forthcoming.


Hypothesis Testing
Serial Correlation AR(1) in a Random Effects Model


LM Test for Serial Correlation and Random Effects




' 2
2
1
, ~ (0, )
~ (0, )
it it i it i u
it it it e
y u v u iid
v v e iid
o
o

= + +
= +
x
2
0
2
0
2
0
: 0, 0
: 0 (assuming 0 pooled model)
: 0 (assuming 0 random effects model)
u
u
u
H
H or
H or
o
o
o
= =
= =
= >
Hypothesis Testing
Test for Serial Correlation
LM Test Statistics: Notations
Based on OLS residuals of the restricted model (i.e. pooled
model with no serial correlation)




2
'
1 1
'
2
1 1
' 1
1 2 1
'
2
1 1

( )
1 1






N T
it
i t
N T
N T
it
i t
N T
it it
i t
N T
it
i t
e
I J
A
e
e e
B
e
= =
= =

= =
= =
| |
|

\ .
= =
= =

e e
ee
ee
ee
Hypothesis Testing
Test for Serial Correlation
Marginal LM Test Statistic for a Pooled Model


See Breusch and Pagan (1980)

Marginal LM Test Statistic for Serial Correlation


See Breusch and Godfrey (1981)






2 2 2
0
( 0) ~ (1)
2( 1)
u
NT
LM A
T

o _
=
= =

2
2
2 2
0
( 0) ~ (1)
( 1)
u
NT
LM B
T
o
_
=
= =

Hypothesis Testing
Test for Serial Correlation
Robust LM Test Statistic






See Baltagi and Li (1995)




( )
2
* 2 2
0
( 0) 2 ~ (1)
2( 1)(1 2 / )
u
NT
LM B A
T T

o _
=
= =

( )
2
2
2
* 2
0
( 0) / ~ (1)
( 1)(1 2 / )
u
NT
LM B A T
T T
o
_
=
= =

Hypothesis Testing
Test for Serial Correlation
Joint LM Test Statistic for Pooled Model with Serial
Correlation






See Baltagi and Li (1995)






( )
2 2 2 2
( 0, 0) 4 2 ~ (2)
2( 1)( 2)
u
NT
LM A AB TB
T T
o _ = = = +

2
2
2
2 2
0
0
* 2
0
0
2 *
0
0
( 0, 0) ( 0) ( 0)
( 0) ( 0)
( 0) ( 0)
u
u
u
u u
u
u
LM LM LM
LM LM
LM LM

o
o o
o
o
=
=
=
=
=
=
= = = = + =
= = + =
= = + =
Hypothesis Testing
Test for Serial Correlation
LM Test Statistic for a Fixed Effects Model




See Baltagi, Econometric Analysis of Panel Data (2008)






' 2
2
1
'

( 0) ~ (1)

1

fixed effects
NT
LM
T
residuals of mean deviation regression
_

= =

= =
ee
ee
e y X
Hypothesis Testing
Test for Serial Correlation
References
Breusch, T. and A. Pagan, A Simple Test of Heteroscedasticity and
Random Coefficient Variations, Econometrica, 47, 1979, 1287-1294.
Breusch, T. and A. Pagan, The LM Test and Its Applications to Model
Specification in Econometrics, Review of Economic Studies, 47, 1980,
239-254.
Breusch, T. and L.G. Godfrey, A Review of Recent Work on Testing for
Autocorrelation in Dynamic Simultaneous Models, in D.A. Currie, R.
Nobay and D. Peel (eds.), Macroeconomic Analysis, Essays in
Macroeconomics and Economics (Croom Helm, London), 63-100.
Baltagi, B.H. and Q. Li, Testing AR(1) Against MA(1) Disturbances in an
Error Components Model, Journal of Econometrics, 68, 1995, 133-151.
Autocorrelation
AR(1)


Assumptions




'
1
( 1, 2,..., ; 1, 2,..., )
it it i it
it it it i
y u e
e e t T i N

= + +
= + = =
x
'
' 2 ' 2 2 2
'
1
'
( | ) 0
( | ) ( | ) (1 )
( , ) 0, ( , ) 0, ( , ) 0
( , ) 0 ( )
it it
it it it it e
it it it i it it
i it
E
Var Var e
Cov e Cov e u Cov e
Cov u random effects only

o o o

=
= = =
= = =
=
x
x x
x
x
Autocorrelation
AR(1) Model Estimation (Paris-Winsten)
Begin with =0, estimate the model



Transform variables according


' '
1
1 2
2
1 1

i
i
it it i it it it it i
N T
it it
i t
N T
it
i t
y u e e y u
e e
e

= =
= =
= + + =
=


x x
*
1
* 2
1 1

, 1

1
it it it
i i
z z z t
z z

= >
=
Autocorrelation
Estimate the transformed model




Iterate until converges

* *' * * '
1
1 2
2
1 1

i
i
it it i it it it it i
N T
it it
i t
N T
it
i t
y u e e y u
e e
e

= =
= =
= + + =
=


x x

(
(

Autocorrelation
Notational Complexity with time lags in unbalanced panel data
(Unbalanced unequal space panel data)

i t z
it
z
it-1
z
*
it
1 1 z
11
. (1-
2
)
1/2
z
11
1 2 z
12
z
11
z
12
-z
11
1 3 . . .
1 4 z
14
. (1-
2
)
1/2
z
14
1 5 z
15
z
14
z
15
-z
14
2 1 z
21
. (1-
2
)
1/2
z
21
2 2 . . .
2 3 . . .
2 4 z
24
. (1-
2
)
1/2
z
24
2 5 z
25
z
24
z
25
-z
24
3 1 . . .
3 2 . . .
3 3 z
33
. (1-
2
)
1/2
z
33
3 4 . z
33
.
3 5 . . .
i t z
it
1 1 z
11

1 2 z
12

1 4 z
14

1 5 z
15

2 1 z
21

2 4 z
24

2 5 z
25

3 3 z
33
Autocorrelation
Hypothesis Testing
Modified Durbin-Watson Test Statistic (Bhargava,
Franzini, Narendranathan, 1982)



LBI Test Statistic (Baltagi-Wu, 1999)
For unbalanced unequal spaced panel data

| |
2
1
1 1
1
2
1 1

i
i
N T
it it
i t
N T
it
i t
e e
d
e

= =
= =

=


Example: Investment Demand
Grunfeld and Griliches [1960]


i = 10 firms: GM, CH, GE, WE, US, AF, DM, GY, UN,
IBM; t = 20 years: 1935-1954
I
it
= Gross investment
F
it
= Market value
C
it
= Value of the stock of plant and equipment
2
1
~ (0, )
it i it it it
it it it e
I F C
e iid
o | c
c c o

= + + +
= +