Directed Tests of No Cross‐Sectional Correlation in Large‐N Panel Data Models

Abstract

SummaryThe paper proposes tests for no cross‐correlation based on the information matrix equality. The tests rely on suitably weighted residual cross‐covariances or cross‐correlations, and are in this sense a generalization of Pesaran's (2004, CESifo working paper 1229) test for no cross‐sectional dependence. They follow chi‐squared distributions under joint N,T asymptotics without restrictive sphericity or distributional assumptions. When using the outcome of the directed tests to decide whether to use panel‐robust standard errors or not for testing slope parameters, the latter tests are apparently not affected; they can be severely affected, though, if using generic cross‐correlation tests as pretests. Copyright © 2015 John Wiley & Sons, Ltd.