TY - JOUR
T1 - Exponent of Cross-Sectional Dependence: Estimation and Inference
AU - Bailey, Natalia
AU - Kapetanios, George
AU - Hashem Pesaran, M
PY - 2016/10/2
Y1 - 2016/10/2
N2 - This paper provides a characterisation of the degree of cross-sectional dependence in a two dimensional array, {xit,i = 1,2,...N;t = 1,2,...,T} in terms of the rate at which the variance of the cross-sectional average of the observed data varies with N. Under certain conditions this is equivalent to the rate at which the largest eigenvalue of the covariance matrix of xt=(x1t,x2t,...,xNt)′ rises with N. We represent the degree of cross-sectional dependence by α, which we refer to as the ‘exponent of cross-sectional dependence’, and define it by the standard deviation, math formula, where math formula is a simple cross-sectional average of xit. We propose bias corrected estimators, derive their asymptotic properties for α > 1/2 and consider a number of extensions. We include a detailed Monte Carlo simulation study supporting the theoretical results. We also provide a number of empirical applications investigating the degree of inter-linkages of real and financial variables in the global economy.
AB - This paper provides a characterisation of the degree of cross-sectional dependence in a two dimensional array, {xit,i = 1,2,...N;t = 1,2,...,T} in terms of the rate at which the variance of the cross-sectional average of the observed data varies with N. Under certain conditions this is equivalent to the rate at which the largest eigenvalue of the covariance matrix of xt=(x1t,x2t,...,xNt)′ rises with N. We represent the degree of cross-sectional dependence by α, which we refer to as the ‘exponent of cross-sectional dependence’, and define it by the standard deviation, math formula, where math formula is a simple cross-sectional average of xit. We propose bias corrected estimators, derive their asymptotic properties for α > 1/2 and consider a number of extensions. We include a detailed Monte Carlo simulation study supporting the theoretical results. We also provide a number of empirical applications investigating the degree of inter-linkages of real and financial variables in the global economy.
U2 - 10.1002/jae.2476
DO - 10.1002/jae.2476
M3 - Article
SN - 0883-7252
VL - 31
JO - JOURNAL OF APPLIED ECONOMETRICS
JF - JOURNAL OF APPLIED ECONOMETRICS
IS - 6
ER -