cdTest¶

Purpose¶

Runs cross-sectional dependence, CD, tests for panel data. The test statistics constructed from the mean t-statistic has an asymptotic standardized normal distribution and tests the null hypothesis that all series are I(1) against the alternative that all series are I(0)

Format¶

cd = cdTest(res, model, grp_vector)¶

Parameters:

res (Nx1 matrix) – residuals from panel data regression.
model (scalar) – indicates which test to run: 1 for Pesaran’s test, 2 for Friedman’s test, 3 for Frees’ test. Note: the only model appropriate for unbalanced data is model 1. This model will run by default if unbalanced panel data is detected.
grp (Nx1 matrix) – group indicator variable.

Returns:

cd (matrix) – test statistic

Example¶

new;
cls;
library tsmt;

/*************************************
//Generate data
**************************************/
// Set panel size parameters
N = 48;
T = 17;

// Simulate balanced group vector
grp = vec(reshape(seqa(1, 1, N), 17, 48));

// Simulate random stacked residuals
rndseed 90782;
y = rndn(T*N, 1);

/*************************************
/Run tests
**************************************/
// Run pesaran test [model = 1]
z1 = cdTest(y, 1, grp);

// Run Friedman test [model = 2]
z2 = cdTest(y, 2, grp);

// Run Frees test [model = 3]
z3 = cdTest(y, 3, grp);

The results printed to screen are

*** Pesaran's Test of Cross-Sectional Independence, Balanced Panels  ***

Pesaran's CD Test Statistic =       0.77992932
p_value =       0.21771624

*** Friedman's Test of Cross-Sectional Independence, Balanced Panels  ***

Friedman's Test Statistic =      21.77124183
p_value =       0.15073260


*** Frees' Test of Cross Sectional Independence for Balanced Panels  ***

The Frees' Test Statistics =
 FRE =       0.08560793         Ave. of R^2 =       0.06428350

Critical Values from Frees' Q-Distribution
Alpha level =                      0.1       0.05       0.01
Critical Values or Quantiles =   0.15205    0.19963    0.29284


*** An Alternative Decision Rule ***
The Null Hypothesis is Rejected when Ave. of R^2 > inv(T-1) + Qq/N      =   0.06860
Notes:
Qq = quantile of the Q-Distribution
N = number of groups

Library¶

tsmt

Source¶

cdtestbalanced.src