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Robust tests for heteroskedasticity in the one-way error components model

Montes-Rojas, G. and Sosa-Escudero, W. (2011). Robust tests for heteroskedasticity in the one-way error components model. Journal of Econometrics, 160(2), pp. 300-310. doi: 10.1016/j.jeconom.2010.09.010

Abstract

This paper constructs tests for heteroskedasticity in one-way error components models, in line with Baltagi et al. [Baltagi, B.H., Bresson, G., Pirotte, A., 2006. Joint LM test for homoskedasticity in a one-way error component model. Journal of Econometrics 134, 401–417]. Our tests have two additional robustness properties. First, standard tests for heteroskedasticity in the individual component are shown to be negatively affected by heteroskedasticity in the remainder component. We derive modified tests that are insensitive to heteroskedasticity in the component not being checked, and hence help identify the source of heteroskedasticity. Second, Gaussian-based LM tests are shown to reject too often in the presence of heavy-tailed (e.g. t-Student) distributions. By using a conditional moment framework, we derive distribution-free tests that are robust to non-normalities. Our tests are computationally convenient since they are based on simple artificial regressions after pooled OLS estimation.

Publication Type: Article
Additional Information: © 2010, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Error components; Heteroskedasticity; Testing
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/12023
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