Acta Univ. Agric. Silvic. Mendelianae Brun. 2013, 61(7), 2151-2155 | DOI: 10.11118/actaun201361072151

Heteroskedasticity, temporal and spatial correlation matter

Ladislava Grochová, Luboš Střelec
Department of Economics, Department of Statistics and Operation Analysis, Mendel University in Brno, 613 00 Brno, Czech Republic

As economic time series or cross sectional data are typically affected by serial correlation and/or heteroskedasticity of unknown form, panel data typically contains some form of heteroskedasticity, serial correlation and/or spatial correlation. Therefore, robust inference in the presence of heteroskedasticity and spatial dependence is an important problem in spatial data analysis. In this paper we study the standard errors based on the HAC of cross-section averages that follows Vogelsang's (2012) fixed-b asymptotic theory, i.e. we continue with Driscoll and Kraay approach (1998). The Monte Carlo simulations are used to investigate the finite sample properties of commonly used estimators both not accounting and accounting for heteroskedasticity and spatiotemporal dependence (OLS, GLS) in comparison to brand new estimator based on Vogelsang's (2012) fixed-b asymptotic theory in the presence of cross-sectional heteroskedasticity and serial and spatial correlation in panel data with fixed effects. Our Monte Carlo experiment shows that the OLS exhibits an important downward bias in all of the cases and almost always has the worst performance when compared to the other estimators. The GLS corrected for HACSC performs well if time dimension is greater than cross-sectional dimension. The best performance can be attributed to the Vogelsang's estimator with fixed-b version of Driscoll-Kraay standard errors.

Keywords: heteroskedasticity, serial correlation, spatial correlation, Monte Carlo simulation, panel data, HAC estimator
Grants and funding:

Results published in the paper are a part of a research project "WWWforEurope" No. 290647 within Seventh Framework Programme supported financially by the European Commission.

Received: August 26, 2013; Published: December 24, 2013  Show citation

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Grochová, L., & Střelec, L. (2013). Heteroskedasticity, temporal and spatial correlation matter. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 61(7), 2151-2155. doi: 10.11118/actaun201361072151
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