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st: cross-sectional dependence in panels - Pesaran test

From   Krishna Naidoo <>
Subject   st: cross-sectional dependence in panels - Pesaran test
Date   Fri, 9 Jun 2006 04:28:03 -0700 (PDT)

Dear Statalist

I have an unbalanced panel with N>t. I need to test
for cross-sectional dependence. I tried using xttest2
but it gave an error code, presumably because of the
N>t issue:
__000002 not found

I would thus like to implement the Pesaran test for
cross-sectional dependence in a panel. A previous
posting by Vasilis Sarafidis

indicated that 
"If you mean testing for cross-sectional correlation
in a panel with N > T, there is a recent paper by
Hashem Pesaran, which is easy to read and you can do
the calculations within 5 minutes in Stata. See";

I have looked at the paper but really do not
understand how to go about implementing the test in
practice. I gather that one needs to constuct a
correlation matrix from the residuals and somehow sum
up the elements of the martrix. But can anyone explain
to me in a very simple step-by-step way, preferably
with an example of some code (assuming no user-written
program already exists for this) how to implement this
test in practice? I have really tried working it out
myself and simply dont know how to proceed. I have
never worked with matrices in Stata before and am a
bit desperate!

Many thanks
Krishna Naidoo

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