Testing for heteroskedasticity in two-way fixed effects panel data models

ABSTRACT

In this paper, we propose a new method for testing heteroskedasticity in two-way fixed effects panel data models under two important scenarios where the cross-sectional dimension is large and the temporal dimension is either large or fixed. Specifically, we will develop test statistics for both cases under the conditional moment framework, and derive their asymptotic distributions under both the null and alternative hypotheses. The proposed tests are distribution free and can easily be implemented using the simple auxiliary regressions. Simulation studies and two real data analyses demonstrate that our proposed tests perform well in practice, and may have the potential for wide application in econometric models with panel data.

Keywords:

• Asymptotic distribution
• heteroskedasticity
• panel data
• testing
• two-way fixed effects model

Acknowledgments

The authors would like to thank the editor, associate editor and two referees for insightful comments that led to an improvement of an earlier manuscript.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

Sanying Feng's research was supported by the National Natural Science Foundation of China [grant number 11501522]. Gaorong Li's research was supported by the National Natural Science Foundation of China [grant numbers 11871001 and 11471029] and the Beijing Natural Science Foundation [grant number 1182003]. Tiejun Tong's research was supported by the National Natural Science Foundation of China [grant number 11671338] and the Health and Medical Research Fund [grant number 04150476]. Shuanghua Luo's research was supported by the National Natural Science Foundation of China [grant number 11601409].