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Economic Policy

Syracuse University

Sphericity

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Asymptotic Power Of The Sphericity Test Under Weak And Strong Factors In A Fixed Effects Panel Data Model, Badi H. Baltagi, Chihwa Kao, Fa Wang Mar 2016

Asymptotic Power Of The Sphericity Test Under Weak And Strong Factors In A Fixed Effects Panel Data Model, Badi H. Baltagi, Chihwa Kao, Fa Wang

Center for Policy Research

This paper studies the asymptotic power for the sphericity test in a fixed effect panel data model proposed by Baltagi, Feng and Kao (2011), (JBFK). This is done under the alternative hypotheses of weak and strong factors. By weak factors, we mean that the Euclidean norm of the vector of the factor loadings is O(1). By strong factors, we mean that the Euclidean norm of the vector of factor loadings is O(pn), where n is the number of individuals in the panel. To derive the limiting distribution of JBFK under the alternative, we first derive the limiting distribution of its …