Monte Carlo results on several new and existing tests for the error component model

Abstract

The Breusch-Pagan test is a popular test for testing zero variances in a random error component model. Realizing the one-sided nature of this problem, Honda (1985) derived the one-sided LM test for the one-way error component model, and suggested a ‘handy’ one-sided candidate for the two-way error component model. In this paper, we derive a new one-sided test for testing the two-way error component model based upon the results of Gourieroux, Holly, and Monfort (1982). Next, we derive a LM test for testing zero individual (time-specific) effects assuming that the other time period (individual) effects are present. This is in contrast to the usual LM test which assumes that, under the null hypothesis, both effects are absent. Exact power comparisons (whenever possible) as well as Monte Carlo experiments are employed to compare the performance of these tests with the corresponding likelihood ratio and ANOVA F tests.