Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations

Arellano, Manuel; Bond, Stephen

doi:10.2307/2297968

Cited by 33,272Spatial and Panel Data AnalysisStatistical Methods and Bayesian InferenceAdvanced Causal Inference Techniques

Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations

Arellano, Manuel, Bond, Stephen·1991·The Review of Economic Studies

DOI 10.2307/2297968

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Abstract

This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.

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Arellano and Bond (1991) and Hansen and Singleton (1982) J-test are employed to check for the absence of second-order serial correlation and the validity of the instruments.
“Arellano and Bond (1991) and Hansen and Singleton (1982) J-test are employed to check for the absence of second-order serial correlation and the validity of the instruments, respectively.”
From The impact of financial development on economic growth in sub-Saharan Africa. Does institutional quality matter? (2023) · cites this paper as Arellano and Bond (1991)
The null hypothesis of the Arellano-Bond and Hansen J tests is no second-order serial correlation and validity of instruments.
“The null hypothesis of these tests suggests no second-order serial correlation and validity of instruments.”
From The impact of financial development on economic growth in sub-Saharan Africa. Does institutional quality matter? (2023) · cites this paper as Arellano and Bond (1991)
The GMM method allows control of endogeneity issues as well as model robustness.
“This method, which was also employed by Cooray (2010) and Botev et al. (2019), allows control of endogeneity issues as well as model robustness.”
From The impact of stock market development on economic growth: A GMM approach (2021) · cites this paper as Arellano and Bond (1991)
The GMM estimator of Arellano and Bond (1991) was used to obtain the most reliable estimates.
“As a result, the GMM suggested by Arellano and Bond (1991) was used to estimate the most reliable results.”
From The impact of stock market development on economic growth: A GMM approach (2021) · cites this paper as Arellano and Bond (1991)
The GMM technique in first difference permits dealing with the endogeneity problem concerned with the study's variables.
“The GMM techniques is in the first difference and its permit taking to deal with endogeneity problem concerned with variables of the study.”
From The effect of financial development on economic Growth: Evidence from south Asian developing countries (2022) · cites this paper as Arellano & Bond, 1991

The system GMM model provides robustness and avoids the problem of heteroskedasticity.
“The system GMM model provides robustness and avoids the problem of heteroskedasticity (Manuel Arellano & Bond, 1991).”
From The Impact of Financial Development in Driving Economic Growth in the MENA Region (2025) · cites this paper as Manuel Arellano & Bond, 1991
The study adopts the Arellano and Bond (1991) Difference Generalized Method of Moments dynamic instrumental variable modeling approach, using lagged values of the dependent variable and differences of the independent variables as valid instruments to control for bias and endogeneity.
“In this regard, the study adopts the Arellano and Bond (1991) Difference Generalized Method of Moments dynamic instrumental variable modeling approach, where the lagged values of the dependent variable (growth) and differences of the independent variables are suitably used as a valid instrument to control for this bias and the obvious endogeneity between lagged growth values and lagged errors.”
From Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges (2007) · cites this paper as Arellano and Bond (1991)
The redundant fixed effect test had highly significant p-values at 0.01, so the null hypothesis of selecting a pooled effect is rejected and fixed effects is consistent and efficient.
“The p-values are highly significant at 0.01; therefore, the null hypothesis of selecting a pooled effect is rejected, FE is consistent and efficient (Arellano & Bond, 1991).”
From The Impact of Liquidity and Leverage on the Financial Performance of the Johannesburg Stock Exchange-Listed Consumer Goods Firms (2025) · cites this paper as Arellano & Bond, 1991
The Hausman test had a p-value highly significant at 0.01, so the null hypothesis of selecting random effects is rejected, fixed effects is consistent and efficient, and the study's analysis is based on the fixed effects model.
“The p-value is highly significant at 0.01; therefore, the null hypothesis of selecting a RE is rejected, and FE is consistent and efficient (Arellano & Bond, 1991).Consequently, we base this study's analysis on the FE model.”
From The Impact of Liquidity and Leverage on the Financial Performance of the Johannesburg Stock Exchange-Listed Consumer Goods Firms (2025) · cites this paper as Arellano & Bond, 1991
If the probability is greater than 0.05, one fails to reject the null hypothesis that variables are exogenous and PLS is preferred and appropriate.
“If the probability is greater than 0.05, we fail to reject the null hypothesis that states variables are exogenous and PLS is preferred and appropriate (Arellano & Bond, 1991).”
From The Impact of Liquidity and Leverage on the Financial Performance of the Johannesburg Stock Exchange-Listed Consumer Goods Firms (2025) · cites this paper as Arellano & Bond, 1991
GMM controls autocorrelation, endogeneity biases, measurement errors, and omitted variables.
“Arellano efficiently used GMM estimation in 1991 to control autocorrelation, endogeneity biases, measurement errors, and omitted variables [61].”
From Do institutional governance and state fragility affect institutional quality in Asian economies? (2023) · cites this paper as [61]
The study employs a dynamic panel GMM estimator to address potential endogeneity and dynamic relationships between variables.
“This study employs the dynamic panel data GMM estimator introduced by Arellano and Bond (1991) to address potential endogeneity and the dynamic relationships between variables.”
From Financial Openness, Trade Openness, and Economic Growth Nexus: A Dynamic Panel Analysis for Emerging and Developing Economies (2025) · cites this paper as Arellano and Bond (1991)

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“Arellano and Bond (1991) and Hansen and Singleton (1982) J-test are employed to check for the absence of second-order serial correlation and the validity of the instruments, respectively.”
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“These techniques are OLS, fixed effect and GMM which is proposed by (Arellano & Bond, 1991), system GMM (RW Blundell & Bond, 1995).”
Method
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“Arellano efficiently used GMM estimation in 1991 to control autocorrelation, endogeneity biases, measurement errors, and omitted variables [61].”
Method
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Method
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“This study uses the GMM suggested by Arellano and Bond (1991) to estimate model (1).”
BackgroundMethodInfluential

Authors: Arellano, M., & Bond, S.
Affiliations: London School of Economics and Political Science (GB)
University of Oxford (GB)
ORCID: Arellano, Manuel
Bond, Stephen
Venue: The Review of Economic Studies
Publisher: Oxford University Press (OUP)
Published: 1991-04
Volume: 58
Issue: 2
Pages: 277
ISSN: 0034-6527 (ISSN-L)
DOI: 10.2307/2297968
OpenAlex: W2025610165
Cited by: 33,272
References: 18
Citations by year: 2026: 1851 · 2025: 1958 · 2024: 2025 · 2023: 2140 · 2022: 1990 · 2021: 2047 · 2020: 1833 · 2019: 1667 · 2018: 1530 · 2017: 1470 · 2016: 1423 · 2015: 1424 · 2014: 1440 · 2013: 1405 · 2012: 1369
FWCI: 86.84
Type: journal article
Language: en
Open access: closed
Locations: The Review of Economic Studies (publishedVersion)
Oxford University Research Archive (ORA) (University of Oxford) (acceptedVersion)
OpenGrey (Institut de l'Information Scientifique et Technique) (submittedVersion)
RePEc: Research Papers in Economics (submittedVersion)
Topics: Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Spatial and Panel Data Analysis
Physical Sciences › Mathematics › Statistics and Probability › Statistical Methods and Bayesian Inference
Physical Sciences › Mathematics › Statistics and Probability › Advanced Causal Inference Techniques
Keywords: specification tests, panel data, dynamic panel data, generalized method of moments, serial correlation, Hausman test, overidentifying restrictions, lagged dependent variables, individual effects

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Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations

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