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Bias Reduction in Dynamic Panel Data Models by Common Recursive Mean Adjustment

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  • Chi-Young Choi
  • Nelson C. Mark
  • Donggyu Sul

Abstract

The within-group estimator (same as the least squares dummy variable estimator) of the dominant root in dynamic panel regression is known to be biased downwards. This article studies recursive mean adjustment (RMA) as a strategy to reduce this bias for AR("p") processes that may exhibit cross-sectional dependence. Asymptotic properties for "N","T"→∞ jointly are developed. When ( log -super-2"T")("N"/"T")→"ζ", where "ζ" is a non-zero constant, the estimator exhibits nearly negligible inconsistency. Simulation experiments demonstrate that the RMA estimator performs well in terms of reducing bias, variance and mean square error both when error terms are cross-sectionally independent and when they are not. RMA dominates comparable estimators when "T" is small and/or when the underlying process is persistent. Copyright (c) Blackwell Publishing Ltd and the Department of Economics, University of Oxford, 2010.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 72 (2010)
Issue (Month): 5 (October)
Pages: 567-599

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Handle: RePEc:bla:obuest:v:72:y:2010:i:5:p:567-599

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Cited by:
  1. Kim, Hyeongwoo & Durmaz, Nazif, 2012. "Bias correction and out-of-sample forecast accuracy," International Journal of Forecasting, Elsevier, vol. 28(3), pages 575-586.
  2. Hyeongwoo Kim & Young-Kyu Moh, 2010. "Examining the Evidence of Purchasing Power Parity by Recursive Mean Adjustment," Auburn Economics Working Paper Series auwp2010-08, Department of Economics, Auburn University.
  3. Meng, Ming & Lee, Hyejin & Cho, Myeong Hyeon & Lee, Junsoo, 2013. "Impacts of the initial observation on unit root tests using recursive demeaning and detrending procedures," Economics Letters, Elsevier, vol. 120(2), pages 195-199.
  4. Scott, K. Rebecca, 2011. "Demand and Price Volatility: Rational Habits in International Gasoline Demand," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt2q87432b, Department of Agricultural & Resource Economics, UC Berkeley.
  5. Scott, K. Rebecca, 2013. "Demand and Price Uncertainty: Rational Habits in International Gasoline Demand," CUDARE Working Paper Series 1131, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  6. Ka Ming Cheng & Nazif Durmaz & Hyeongwoo Kim & Michael Stern, 2011. "Hysteresis vs. Natural Rate of US Unemployment," Auburn Economics Working Paper Series auwp2011-01, Department of Economics, Auburn University.
  7. Paulo M. M. Rodrigues, 2013. "Recursive adjustment, unit root tests and structural breaks," Journal of Time Series Analysis, Wiley Blackwell, vol. 34(1), pages 62-82, 01.

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