Testing for Spatial Lag Dependence and Homoskedasticity in a Random Effects Panel Data Model

Badi H. Baltagi, Long Liu

Economics Letters, August 2025

Badi H. Baltagi

Economics Department

Center for Policy Research

Research Methods

United States

Economics Letters

Badi H. Baltagi

Abstract

This paper derives a joint Lagrange Multiplier (LM) test for spatial correlation and homoskedasticity for a spatial autoregressive (SAR) panel model with random effects. The heteroskedasticity in the random effects term is an unknown function of known strictly exogenous variables as in Holly and Gardiol (2000).

The latter paper deals with a panel random effects model with heteroskedasticity that ignores the spatial correlation. Conditional LM tests for homoskedasticity given spatial lag correlation, as well as zero spatial lag correlation given heteroskedasticity are also derived.

Monte Carlo experiments are performed to study the small sample performance of these tests.