Tests for random time effects and spatial error correlation in panel regression models

Abstract

We consider a panel model with spatial autocorrelation and heterogeneity across time. Various Lagrange multiplier and likelihood ratio test statistics are developed for testing time effects and spatial effects, jointly, marginally or conditionally. Limiting null distributions of the tests are derived. Size and power performances of the proposed tests are compared by a Monte-Carlo experiment.

Keywords:

• spatial panel data
• factor model
• spatial correlation
• random temporal component
• Lagrange multiplier tests
• likelihood ratio tests

Acknowledgements

The authors are very grateful for valuable comments of a referee, which considerably improved the paper. This research was supported by National Research Foundation of Korea (NRF-2009-0084772, NRF-2009-0070618).