{smcl}
{* 19May06}{...}
{hline}
help for {hi:xtcsd}
{hline}
{title:Test for cross-sectional dependence in panel data models}
{p 8 16 2} {cmd: xtcsd} {cmd:,} [{cmdab:pes:aran} {cmdab:fri:edman} {cmdab:fre:es} {cmdab:abs} {cmdab:show}]
{p 4 8 2} {cmd:xtcsd} is a post-estimation command for use with cross-section time-series data
following {cmd:fe} or {cmd:re} models. You must {help tsset} your data before using {cmd:xtcsd}; see
help {help tsset}.
{title:Description}
{p 4 4 2} {cmd:xtcsd} tests for cross-sectional dependence in Fixed Effects of Random Effects panel data models.
One of method's options {cmd:pesaran} {cmd:friedman} or {cmd:frees} must be specified.
{p 4 4 2} A standard assumption in panel data models ({help xtreg}) is that the error terms are independent across cross-sections.
This assumption is employed for identification purposes rather than descriptive accuracy. In the context of large T
and small N, the LM test statistic proposed by Breusch and Pagan (1980) can be used to test for cross-sectional
dependence (see help {help xttest2}). However, in most cases, cross-sectional time-series data sets come in the form of
small T and large N. In this case the Breusch-Pagan test is not valid.
{p 4 4 2} {cmd:xtcsd} test the hypothesis of cross-sectional independence
in panel data models with small T and large N by implementing two semi-parametric tests proposed by
Friedman (1937) and Frees (1995,2004), as well as the parametric testing procedure proposed by Pesaran (2004).
{cmd:xtcsd} with option {cmd:pesaran} can handle balanced as well as unbalanced panels.
{title:Options}
{p 4 8 2} {cmd:pesaran} test for cross-sectional dependence following the methods shown in Pesaran (2004). Pesaran's
statistic follows a standard normal distribution and it is able to handle balanced and unbalanced panels.
{p 4 8 2} {cmd:friedman} test for cross-sectional dependence using Friedman's chi-square distributed statistic.
For unbalanced panels Friedman's test uses only the observations available for all cross-sectional units.
{p 4 8 2} {cmd:frees} test for cross-sectional dependence using Frees' Q distribution (T-asymptotically distributed).
For unbalanced panels Frees' test uses only the observations available for all cross-sectional units.
{p 4 8 2} {cmd:abs} computes the average absolute value of the off-diagonal elements of the cross-sectional
correlation matrix of residuals.
{p 4 8 2} {cmd:show} shows the cross-sectional correlation matrix of residuals.
{title:Notes}
{p 4 8 2} The small sample comparative performance of these tests under various model specifications is examined
in Sarafidis and De Hoyos (2006).
{title:Examples}
{p 4 8 2} . use "http://www.econ.cam.ac.uk/phd/red29/xtcsd_baltagi.dta"
{p 4 8 2} . xtreg lngsp lnpcap lnpc lnemp unemp, fe
{p 4 8 2} . xtcsd, frees
{p 4 8 2} . xtcsd, pesaran show
{p 4 8 2} . xtreg lngsp lnpcap lnpc lnemp unemp, re
{p 4 8 2} . xtcsd, friedman show abs
{title:References}
{p 4 8 2} Frees, E.W. (1995) `Assessing cross-sectional correlations in panel data',
{it:Journal of Econometrics}, 64, 393-414.
{p 4 8 2} Frees, E.W. (2004) `Longitudinal and panel data: analysis and applications in the social sciences',
{it:Cambridge University Press}.
{p 4 8 2} Friedman, M. (1937) `The use of ranks to avoid the assumption of normality implicit in the analysis of variance',
{it:Journal of the American Statistical Association}, 32, 675-701.
{p 4 8 2} Pesaran, M.H. (2004) `General diagnostic tests for cross section dependence in panels',
{it:Cambridge Working Papers in Economics}, 0435, University of Cambridge.
{p 4 8 2} Sarafidis, V. and De Hoyos, R.E. (2006) `On testing for cross sectional dependence in panel data models',
{it:mimeo}, University of Cambridge.
{title:Acknowledgements}
{p 4 8 2} Our code benefited greatly from Christopher Baum's {help xttest2}. Thanks to David Drukker for very useful suggestions.
{title:Authors}
{browse "http://www.econ.cam.ac.uk/phd/red29/":Rafael E. De Hoyos}, Faculty of Economics, University of Cambridge. {browse "mailto:red29@cam.ac.uk":red29@cam.ac.uk}
{browse "http://www.econ.usyd.edu.au/15583.html":Vasilis Sarafidis}, Discipline of Econometrics and Business Statistics, University of Sydney. {browse "mailto:V.Sarafidis@econ.usyd.edu.au":V.Sarafidis@econ.usyd.edu.au}
{title:Also see}
Manual: {hi:[U] 23 Estimation and post-estimation commands}
{hi:[XT] xtreg}
Online: help for {help xttest2} (if installed), {help bpagan} (if installed), {help ivreg2} (if installed)