Testing Weak Cross-Sectional Dependence in Large Panels

This article considers testing the hypothesis that errors in a panel data model are weakly cross-sectionally dependent, using the exponent of cross-sectional dependence α, introduced recently in Bailey, Kapetanios, and Pesaran (2012). It is shown that the implicit null of the cross-sectional dependence (CD) test depends on the relative expansion rates of N and T . When T = O ( N -super-ε), for some 0 > ε ≤1, then the implicit null of the CD test is given by 0 ≤ α > (2 - ε)/4, which gives 0 ≤ α >1/4, when N and T tend to infinity at the same rate such that T / N → κ, with κ being a finite positive constant. It is argued that in the case of large N panels, the null of weak dependence is more appropriate than the…

• UO
  University of Manchester
• EA
  Economic and Social Research Council

  Award: ES/I031626/1