This paper proposes a residual-based LM test for slope homogeneity in large dimensional panel data models with interactive fixed effects. We first run the panel regression under the null to obtain the restricted residuals, and then use them to construct our LM test statistic. We show that after being appropriately centered and scaled, our test statistic is asymptotically normally distributed under the null and a sequence of Pitman local alternatives. The asymptotic distributional theories are established under fairly general conditions which allow for both lagged dependent variables and conditional heteroskedasticity of unknown form by relying on the concept of conditional strong mixing. To improve the finite sample performance of the test, we also propose a bootstrap procedure to obtain the bootstrap p-values and justify its validity. Monte Carlo simulations suggest that the test has correct size and satisfactory power. We apply our test to study the OECD economic growth model.
Conditional strong mixing, Cross-sectional dependence, Heterogeneity, Interactive fixed effects, Large panels, LM test, Principal component analysis
Cambridge University Press
SU, Liangjun and CHEN, Qihui.
Testing Homogeneity in Panel Data Models with Interactive Fixed Effects. (2013). Econometric Theory. 29, (6), 1079-1135. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1434
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