Testing model adequacy for dynamic panel data with intercorrelation

We give several definitions of residual autocorrelations and derive their joint asymptotic distribution for the panel time series model of Hjellvik & Tjøstheim (1999a). A portmanteau goodness-of-fit test arises naturally from the asymptotic distribution. Simulation results show that the asymptotic standard errors compared satisfactorily with the empirical standard errors, that the goodness-of-fit test has reasonable empirical size, and that it is powerful enough to be useful with a modest sample size. The results of this paper are illustrated with a real-data example. © 2002 Biometrika Trust.