General Diagnostic Tests for Cross Section Dependence in Panels
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This paper proposes simple tests of error cross section dependence which are applicable to a variety of panel data models, including stationary and unit root dynamic heterogeneous panels with short T and large N. The proposed tests are based on average of pair-wise correlation coefficients of the OLS residuals from the individual regressions in the panel, and can be used to test for cross section dependence of any fixed order p, as well as the case where no a priori ordering of the cross section units is assumed, referred to as CD(p) and CD tests, respectively. Asymptotic distribution of these tests are derived and their power function analyzed under different alternatives. It is shown that these tests are correctly centred for fixed N and T, and are robust to single or multiple breaks in the slope coefficients and/or error variances. The small sample properties of the tests are investigated and compared to the Lagrange multiplier test of Breusch and Pagan using Monte Carlo experiments. It is shown that the tests have the correct size in very small samples and satisfactory power, and as predicted by the theory, quite robust to the presence of unit roots and structural breaks. The use of the CD test is illustrated by applying it to study the degree of dependence in per capita output innovations across countries within a given region and across countries in different regions. The results show significant evidence of cross dependence in output innovations across many countries and regions in the World.
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The study uses Pesaran's CD test to test for cross-sectional dependence because N is large and T is small.
“First, we test for cross-sectional dependence using Pesaran’s CD test (2004) in order to determine the appropriate estimation technique.”
From The manufacturing output effects of infrastructure development, liberalization and governance: evidence from Sub-Saharan Africa (2022) · cites this paper as Pesaran (2004)
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- Authors
- Pesaran, M. H.
- Affiliations
- University of Southern California (US)
- Corresponding author
- Pesaran, M. Hashem
- ORCID
- Pesaran, M. Hashem
- Venue
- SSRN Electronic Journal
- Publisher
- Elsevier BV
- Published
- 2004
- ISSN
- 1556-5068 (ISSN-L)
- OpenAlex
- W2123136623
- Cited by
- 8,738
- References
- 0
- Citations by year
- 2026: 894 · 2025: 925 · 2024: 1010 · 2023: 1128 · 2022: 904 · 2021: 785 · 2020: 718 · 2019: 459 · 2018: 344 · 2017: 271 · 2016: 243 · 2015: 217 · 2014: 220 · 2013: 157 · 2012: 121
- Type
- posted content
- Language
- en
- Open access
- green
- doi.org
- Locations
- SSRN Electronic Journal (acceptedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Spatial and Panel Data Analysis
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic Growth and Productivity
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Risk and Volatility Modeling
- Keywords
- cross-sectional dependence, panel data models, structural breaks, small sample properties, power function
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