The PCSE Estimator is Good -- Just Not As Good As You Think
AbstractThis paper investigates the properties of the Panel-Corrected Standard Error (PCSE) estimator. The PCSE estimator is commonly used when working with time-series, cross-sectional (TSCS) data. In an influential paper, Beck and Katz (1995) (henceforth BK) demonstrated that FGLS produces coefficient standard errors that are severely underestimated. They report Monte Carlo experiments in which the PCSE estimator produces accurate standard error estimates at no or little loss in efficiency compared to FGLS. Our study further investigates the properties of the PCSE estimator. We first reproduce the main experimental results of BK using their Monte Carlo framework. We then show that the PCSE estimator does not perform as well when tested in data environments that better resemble practical research situations. When (i) the explanatory variable(s) are characterized by substantial persistence, (ii) there is serial correlation in the errors, and (iii) the time span of the data series is relatively short, coverage rates for the PCSE estimator frequently fall between 80 and 90 percent. Further, we find many practical research situations where the PCSE estimator compares poorly with FGLS on efficiency grounds.
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Bibliographic InfoArticle provided by De Gruyter in its journal Journal of Time Series Econometrics.
Volume (Year): 2 (2010)
Issue (Month): 1 (September)
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Web page: http://www.degruyter.com
Other versions of this item:
- W. Robert Reed & Rachel Webb, 2010. "The PCSE Estimator is Good -- Just Not as Good as You Think," Working Papers in Economics 10/53, University of Canterbury, Department of Economics and Finance.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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