Testing for heteroskedasticity in two-way fixed effects panel data models.

In this paper, we propose a new method for testing heteroskedasticity in two-way fixed effects panel data models under two important scenarios where the cross-sectional dimension is large and the temporal dimension is either large or fixed. Specifically, we will develop test statistics for both cases under the conditional moment framework, and derive their asymptotic distributions under both the null and alternative hypotheses. The proposed tests are distribution free and can easily be implemented using the simple auxiliary regressions.