Factor Residuals in SUR Regressions: Estimating Panels Allowing for Cross Sectional Correlation
AbstractThis 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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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0473.
Date of creation: Oct 2000
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Panel data; cross sectional correlation; factor analysis;
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