A practical test for strict exogeneity in linear panel data models with fixed effects

• Main Authors: SU, Liangjun, ZHANG, Yonghui, WEI, Jie
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Bootstrap; Fixed effects; Panel data; Strict exogeneity; Wald test; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1936; https://ink.library.smu.edu.sg/context/soe_research/article/2935/viewcontent/PracticalTestStrictExogenityLinearPanelModels_20160715_pp.pdf
• Institution: Singapore Management University

This paper provides a practical test for strict exogeneity in linear panel data models with fixed effects when the number of individuals N goes to infinity while the number of time periods T is fixed. The test is based on the supremum of a sequence of Wald test statistics. Under suitable conditions, we establish the asymptotic distribution of the test statistic and consistency of the test. A bootstrap procedure is proposed to improve the finite sample performance and the validity of the procedure is justified. We investigate the finite sample performance of the test via a small set of Monte Carlo simulations.