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Factor Residuals in SUR Regressions: Estimating Panels Allowing for Cross Sectional Correlation

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Author Info
D Robertson
J Symons
Abstract

This paper describes a method for estimating panels by imposing a factor structure on the residuals. The method allows SUR estimation of panel models by providing a full-rank estimator of the system covariance matrix when the usual estimate is rank-deficient. We charactersie completely the circumstances when this is possible. When the usual estimator is of full rank, our procedure provides a more parsimonious representation of the covariance matrix, which can lead to efficiency gains in finite samples. Monte Carlo analysis of convergence regressions and PPP regressions in the Heston-Summers data-set indicates that the proposed estimator has better performance in terms of RMSE and bias than standard panel or SUR estimators (where available), as well as offering unbiased inference.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number 0473.

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Date of creation: Oct 2000
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Handle: RePEc:cep:cepdps:0473

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Keywords: Panel data cross sectional correlation factor analysis

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  1. Conley, T. G., 1999. "GMM estimation with cross sectional dependence," Journal of Econometrics, Elsevier, vol. 92(1), pages 1-45, September. [Downloadable!] (restricted)
  2. Connor, Gregory & Korajczyk, Robert A., 1988. "Risk and return in an equilibrium APT : Application of a new test methodology," Journal of Financial Economics, Elsevier, vol. 21(2), pages 255-289, September. [Downloadable!] (restricted)
  3. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
  4. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
  5. Frees, Edward W., 1995. "Assessing cross-sectional correlation in panel data," Journal of Econometrics, Elsevier, vol. 69(2), pages 393-414, October. [Downloadable!] (restricted)
  6. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Lee, K. & Psaran, M.H. & Smith, R., 1995. "Growth and Convergence: A Multi-Country Empirical Analysis of the Solow Growth Model," Cambridge Working Papers in Economics 9531, Faculty of Economics, University of Cambridge.
  8. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Adriana Di Liberto & James Symons, 2003. "Some Econometric Issues in Convergence Regressions," Manchester School, University of Manchester, vol. 71(3), pages 293-307, 06. [Downloadable!] (restricted)
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  10. Charles I. Jones, . "Convergence Revisited," Working Papers 96006, Stanford University, Department of Economics. [Downloadable!]
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  11. Mankiw, N Gregory & Romer, David & Weil, David N, 1992. "A Contribution to the Empirics of Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 407-37, May. [Downloadable!] (restricted)
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  12. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November. [Downloadable!] (restricted)
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  15. Evans, Paul & Karras, Georgios, 1996. "Convergence revisited," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 249-265, April. [Downloadable!] (restricted)
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  17. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November. [Downloadable!] (restricted)
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  1. Hsiao, Cheng & Pesaran, M. Hashem, 2004. "Random Coefficient Panel Data Models," IZA Discussion Papers 1236, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. M. Hashem Pesaran, 2003. "Estimation and Inference in Large Heterogenous Panels with Cross Section Dependence," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  3. Jushan Bai & Chihwa Kao, 2005. "On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence," Center for Policy Research Working Papers 75, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  4. Manfred Keil & Donald Robertson & James Symons, 2001. "Minimum Wages and Employment," CEP Discussion Papers 0497, Centre for Economic Performance, LSE. [Downloadable!]
  5. Adriana Di Liberto, 2004. "Convergence clubs and the role of human capital in Spanish Regional Growth," Working Paper CRENoS 200418, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia. [Downloadable!]
  6. Pesaran, M.H. & Tosetti, E., 2007. "Large Panels with Common Factors and Spatial Correlations," Cambridge Working Papers in Economics 0743, Faculty of Economics, University of Cambridge. [Downloadable!]
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