A Principal Components Approach to Cross-Section Dependence in Panels



Table 3. Between-group correlations and retained factors

ADF

ARDL

Panel

r

γ

λLR

τ

r

γ

λLR

τ

CPI-DM

.265

8.641

1956

3

.274

8.288

2023

3

[.000]

[.000]

CPI-US$

.645

24.85

7274

1

.651

19.75

7059

1

[.000]

[.000]

WPI-DM

.272

7.836

1550

2

.275

7.419

1544

2

[.000]

[.000]

WPI-US$

.619

19.60

4859

1

.613

17.70

4869

1

[.000]

[.000]

Note: r is the average cross-section correlation, γ = (λmax )1/2 is the condition
λmin

number, λLR is the p -value of Breusch-Pagan diagonality test on the residual
correlation matrix and τ is the number of factors retained by Kaiser criterion. All
of these are computed from the equation-by-equation OLS residuals.

25



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