Testing for sphericity in a fixed effects panel data model with time-varying variances

摘要

This paper proposes a test for the null of sphericity in a fixed effects panel data model with time-varying variances. We construct new test statistics using the within residuals from the fixed effects panel data regression model on the basis of Li and Yao's (2018) test procedure. We show that the newly proposed test converges to a standard normal distribution as (n, T) - infinity with n/T - c is an element of (0, infinity). The power properties of the test are studied under both weak and strong factor model alternatives. Monte Carlo simulations are conducted to examine the finite sample performance. (C) 2019 Elsevier B.V. All rights reserved.