Estimation methods in panel data models with observed and unobserved components: a Monte Carlo study

Castagnetti, Carolina and Rossi , Eduardo (2008): Estimation methods in panel data models with observed and unobserved components: a Monte Carlo study. Unpublished.

Abstract

Recently some new techniques have been proposed for the estimation of the slope coefficients in presence of unobserved components. Though, the presence of common observed and unobserved factors is neither considered or the estimation of their impacts is not taken into account. In this work a range of estimators is surveyed and their finite-sample properties are examined by means of Monte Carlo experiments. We consider both the properties of estimators for the individual specific components and for the observed common effects.

• Item Type: MPRA Paper
• Language: English
• Keywords: factor error structure; principal component; common regressors; cross-section dependence; large panels, Monte Carlo simulations.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C23 - Models with Panel Data; C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C33 - Models with Panel Data

References

Ahn, S., Y. Lee, and P. Schmidt (2001): “GMM Estimation of Linear Panel Data Models with Time-varying Individual Effects,” Journal of Econometrics, 101, 219–255.

Ahn, S., Y. Lee, and P. Schmidt (2006): “Panel Data Models with Multiple Time-Varying Individual Effects,” mimeo.

Ahn, S., and M. Perez (2008): “GMM Estimation of the Number of Latent Factors,”mimeo.

Bai, J. (2003): “Inferential Theory for Factor Models of Large Dimensions,” Econometrica, 71(1), 135–171.

Bai, J. (2005): “Panel Data Models with Interactive Fixed Effects,” mimeo.

Bai, J., and S. Ng (2002): “Determining the Number of Factors in Approximate Factor Models,” Econometrica, 70(1), 191–221.

Bai, J., and S. Ng (2006a): “Confidence Intervals for Diffusion Index Forecasts and Inference for Factor-Augmented Regressions.,” Econometrica, 74(4), 1133–1150.

Bai, J., and S. Ng (2006b): “Evaluating Latent and Observed Factors in Macroeconomics and Finance.,” Journal of Econometrics, 113(1), 507–537.

Castagnetti, C., and E. Rossi (2008): “Euro Corporates Bonds Risk Factors,”Mimeo.

Coakley, J., A. Fuertes, and R. Smith (2002): “A Principal Component Approach to Cross-Section Dependence in Panels,” Discussion paper, Birkbeck College.

Cochrane, J., and M. Piazzesi (2005): “Bond Risk Premia,” The American Economic Review, 95, 138–160.

Fama, E., and K. French (1993): “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, 33(1), 3–56.

Kao, C., L. Trapani, and G. Urga (2008): “The Asymptotics for Panel Models with Common Shocks,” mimeo.

Kapetanios, G., and M. Pesaran (2005): Alternative Approaches to Estimation and Inference in Large Multifactor Panels: Small Sample Results with an Application to Modelling of Asset Returnsvol. forthcoming in The Refinement of Econometric Estimation and Test Procedures: Finite Sample and Asymptotic Analysis. Garry Phillips and Elias Tzavalis, Cambridge, cambridge university press edn.

Kiefer, N. (1980): “A Time Series-Cross Section Model with Fixed Effects with an Intertemporal Factor Structure,” Unpuplished manuscript, Cornell University.

Lettau, M., and S. Ludvigson (2001): “Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia are Time Varying,” Journal of Political Economy, 109, 1238–1287.

Ludvigson, S., and S. Ng (2008): “Macro Factors in Bond Risk Premia,” The Review of Financial Studies, forthcoming.

Mardia, K., J. Kent, and J. Bibby (1979): Multivariate Analysis. Academic Press.

Moon, H. R., and M. Weidner (2008): “Asymptotic Analysis of the quasi-MLE of Panel Regression Models with Interactive Fixed Effects,” Department of Economics, UCS.

Mundlak, Y. (1978): “On the Pooling of Time Series and Cross Section Data,” Econometrica, 46, 69–85.

Neyman, J., and E. Scott (1948): “Consistent Estimates Based on Partially Consistent Observations,” Econometrica, 16, 1–32.

Pesaran, M. (2004): “Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,” mimeo, Cambridge University.

Pesaran, M. (2006): “Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure,” Econometrica, 74(4), 967–1012.

Pesaran, M., and R. Smith (1995): “Estimating Long-Run Relationships from Dynamic Heterogeneous Panels,” Journal of Econometrics, 68(1), 79–113.

Stock, J., and M. Watson (2002): “Macroeconomic Forecasting Using Diffusion Indexes,” Journal of Business and Economic Statistics, 20, 147–162.

Wansbeek, T., and E. Meijer (2000): Measurement Error and Latent Variables in Economics. North-Holland.