A Portmanteau Test for Correlation in Short Panels

Abstract

Inoue and Solon (2006, A Portmanteau test for serially correlated errors in fixed effects models, Econometric Theory 22, 835{851) presented an elegant approach to test for serial correlation of arbitrary form in fixed-effect models for short panel data. Their approach requires the choice of a regularization parameter that may severely affect the power of the test and for which no optimal selection rule is available. We present a modified version of their test that uses strictly more information and does not require any regularization parameter. Monte Carlo simulations are provided to illustrate the power gains of our procedure.