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Standardized LM tests for spatial error dependence in linear or panel regressions
Article first published online: 12 FEB 2013
DOI: 10.1111/j.1368-423X.2012.00385.x
© 2013 The Author(s). The Econometrics Journal © 2013 Royal Economic Society.
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How to Cite
Baltagi, B. H. and Yang, Z. (2013), Standardized LM tests for spatial error dependence in linear or panel regressions. The Econometrics Journal, 16: 103–134. doi: 10.1111/j.1368-423X.2012.00385.x
Publication History
- Issue published online: 12 FEB 2013
- Article first published online: 12 FEB 2013
- Accepted manuscript online: 21 AUG 2012 12:00AM EST
- First version received: October 2010; final version accepted: August 2012
- Abstract
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Keywords:
- Bootstrap;
- Distributional mis-specification;
- Group interaction;
- LM test;
- Moran’s I test;
- Robustness;
- Spatial layout;
- Spatial panel models
Summary The robustness of the Lagrange Multiplier (LM) tests for spatial error dependence of Burridge (1980) and Born and Breitung (2011) for the linear regression model, and Anselin (1988) and Debarsy and Etur (2010) for the panel regression model with random or fixed effects are examined. While all tests are asymptotically robust against distributional mis-specification, their finite sample behaviour may be sensitive to the spatial layout. To overcome this shortcoming, standardized LM tests are suggested. Monte Carlo results show that the new tests possess good finite sample properties. An important observation made throughout this study is that the LM tests for spatial dependence need to be both mean- and variance-adjusted for good finite sample performance to be achieved. The former is, however, often neglected in the literature.