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From |
christina sakali <christina.sakali@googlemail.com> |

To |
statalist <statalist@hsphsun2.harvard.edu> |

Subject |
st: Cross-sectional dependence in fixed effects panel model |

Date |
Wed, 14 Sep 2011 12:43:56 +0300 |

Dear Statalisters, I would like to estimate a fixed effects panel model with possible cross-sectional dependence (contemporaneous correlation). My sample consists of N=11, T=11. My question regards both the interpretation of the tests contained in xtcsd and the estimation with Driscoll-Kraay S.E. under xtscc: 1. First, I am not completely sure how I should interpret results of the tests contained in xtcsd and xttest2, given the fact that I got some conflicting results from these tests, which are provided below. My feeling is that I should trust the results of the Pesaran test (as more appropriate for my sample), which indicates the presence of cross-sectional dependence, but again I am a little confused regarding the conflicting and inconclusive results from the other tests. 2. Second, if my model does suffer from cross-sectional dependence, I am wondering whether the Driscoll-Kraay S.E. (xtscc) are appropriate for my case. De Hoyos and Sarafidis (2006, p.1-2) clearly mention that if "cross-sectional dependence is caused by the presence of common factors, which are unobserved ... but uncorrelated with the included regressors, ... one may chose to rely on standard FE/RE methods and correct the SE by following the approach proposed by Driskoll and Kraay (1998). On the other hand, if the unobserved components that create interdependencies across cross-sections are correlated with the included regressors, these approaches will not work and the FE and RE estimators will be biased and inconsistent. In this case, one may follow the approach proposed by Pesaran (2006). Based on the above, I would like to ask if there is a way to find out which of the two cases mentioned by De Hoyos and Sarafidis (2006) is relevent for my model and what other alternatives I 've got in Stata, in order to produce robust S.E. in presence of contemporaneous correlation, apart from the Driskoll and Kraay S.E. In case this is relevant to the above, the residuals in my model seem to be heteroscedastic but not serially correlated (after checking the stats in xttest 3 and xtregar ..., fe lbi) I am using Stata 9.2 at home but I could possibly have access to some newer version of Stata at faculty. Results from xtcsd and xttest2 are provided below: qui xtreg fdi gg rulc trade tert sec eu, fe . xtcsd, pesaran abs Pesaran's test of cross sectional independence = 2.899, Pr = 0.0037 Average absolute value of the off-diagonal elements = 0.302 . xtcsd, friedman Friedman's test of cross sectional independence = 17.537, Pr = 0.0633 . xtcsd, frees Frees' test of cross sectional independence = 0.244 |--------------------------------------------------------| Critical values from Frees' Q distribution alpha = 0.10 : 0.2333 alpha = 0.05 : 0.3103 alpha = 0.01 : 0.4649 . xttest2 Breusch-Pagan LM test of independence: chi2(55) = 79.711, Pr = 0.0164 Based on 11 complete observations over panel units * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**Follow-Ups**:**st: RE: Cross-sectional dependence in fixed effects panel model***From:*"Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>

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