Testing for sphericity in a fixed effects panel data model with time-varying variances

This paper proposes a test for the null of sphericity in a fixed effects panel data model with time-varying variances. We construct new test statistics using the within residuals from the fixed effects panel data regression model on the basis of Li and Yao’s (2018) test procedure. We show that the n...

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Bibliographic Details
Published in:Economics letters 2019-08, Vol.181, p.85-89
Main Authors: Peng, Bin, Shen, Xinyuan, Ye, Jinqi
Format: Article
Language:English
Subjects:
Data analysis
Data models
Fixed effects
Longitudinal studies
Monte Carlo simulation
Normal distribution
Panel data
Panel data model
Power
Regression analysis
Sphericity test
Time-varying variances
Variances
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Summary:This paper proposes a test for the null of sphericity in a fixed effects panel data model with time-varying variances. We construct new test statistics using the within residuals from the fixed effects panel data regression model on the basis of Li and Yao’s (2018) test procedure. We show that the newly proposed test converges to a standard normal distribution as (n,T)→∞ with n∕T→c∈(0,∞). The power properties of the test are studied under both weak and strong factor model alternatives. Monte Carlo simulations are conducted to examine the finite sample performance. •We propose a new test for sphericity for the fixed effects panel data model.•The newly proposed test is robust to time-varying variances.•We derive the asymptotic distribution of the test under the null.•We study the power properties of the test under the factor alternatives.•Monte Carlo results show that the test performs well in small samples.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2019.05.012