Autocorrelation Testing with Categorical data

[Suren Perera]

Hello everyone,

I'm conducting a panel data regression with a continuous dependent variable (Share price - SP), one categorical independent variable (TYPE OF INDUSTRY - TYPE) and other three continuous independent variables. During serial correlation testing using the Wooldridge test, I encountered an error indicating that factor variables and time-series operators are not permitted in the command 'xtserial SP1 DPS1 DPR1 RR1 i.TYPE.

Considering this,
01. Is it acceptable to execute the command without explicitly identifying the variable's categorical nature? example: xtserial SP1 DPS1 DPR1 RR1 TYPE
02. If not what would be the most suitable approach for assessing autocorrelation under such circumstances?

[Carlo Lazzaro]

Suren:
the -xi:- prefix is the answer to your query:

. use "https://www.stata-press.com/data/r18/nlswork.dta"
(National Longitudinal Survey of Young Women, 14-24 years old in 1968)

. xtreg ln_wage i.race, re

Random-effects GLS regression                   Number of obs     =     28,534
Group variable: idcode                          Number of groups  =      4,711

R-squared:                                      Obs per group:
     Within  = 0.0000                                         min =          1
     Between = 0.0198                                         avg =        6.1
     Overall = 0.0186                                         max =         15

                                                Wald chi2(2)      =      99.02
corr(u_i, X) = 0 (assumed)                      Prob > chi2       =     0.0000

------------------------------------------------------------------------------
     ln_wage | Coefficient  Std. err.      z    P>|z|     [95% conf. interval]
-------------+----------------------------------------------------------------
        race |
      Black  |  -.1300382    .013486    -9.64   0.000    -.1564702   -.1036062
      Other  |   .1011474   .0562889     1.80   0.072    -.0091768    .2114716
             |
       _cons |   1.691756   .0071865   235.41   0.000     1.677671    1.705841
-------------+----------------------------------------------------------------
     sigma_u |  .38195681
     sigma_e |  .32028665
         rho |  .58714668   (fraction of variance due to u_i)
------------------------------------------------------------------------------

. help xtserial

. xtserial ln_wage i.race
factor-variable and time-series operators not allowed
r(101);

. xi: xtserial ln_wage i.race
i.race            _Irace_1-3          (naturally coded; _Irace_1 omitted)

Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
    F(  1,    1530) =    134.775
           Prob > F =      0.0000

.

[Suren Perera]

Dear Carlo, I appreciate your valuable insights and expertise on this matter. Thank you for your contribution.