Directed Tests of No Cross‐Sectional Correlation in Large‐N Panel Data Models

The paper proposes tests for no cross-correlation based on the information matrix equality. The tests rely on suitably weighted residual cross-covariances or cross-correlations, and are in this sense a generalization of Pesaran's (2004, CESifo working paper 1229) test for no cross-sectional dependence. They follow chi-squared distributions under joint N,T asymptotics without restrictive sphericity or distributional assumptions. When using the outcome of the directed tests to decide whether to use panel-robust standard errors or not for testing slope parameters, the latter tests are apparently not affected; they can be severely affected, though, if using generic cross-correlation tests as pretests. Copyright (c) 2015 John Wiley & Sons, Ltd.