Estimation and Inference in Large Heterogenous Panels with Cross Section Dependence
AbstractThis paper presents a new approach to estimation and inference in panel data models with unobserved common factors possibly correlated with exogenously given individual-specific regressors and/or the observed common effects. The basic idea behind the proposed estimation procedure is to filter the individual-specific regressors by means of (weighted) cross-section aggregates such that asymptotically as the cross-section dimension (N) tends to infinity the differential effects of unobserved commond factors are eliminated. The estimation procedure has the advantage that it can be computed by OLS applied to an auxiliary regression where the observed regressors are augmented by cross sectional averages of the dependent variable and the individual specific regressors. It is shown that the proposed correlated common effects (CCE) estimators for the individual-specific regressors (and its pooled counterpart) are asymptotically unbiased as N approaches infinity, both when T (the time-series dimension) is fixed, and when N and T tend to infinity jointly. A generalization of these results to multi-factor structures is also provided. The estimation and inference in dynamic heterogenous panels with a residual factor structure will be addressed in a companion paper.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 869.
Date of creation: 2003
Date of revision:
cross section dependence; large panels; common correlated effects; heterogeneity; estimation and inference;
Other versions of this item:
- Pesaran, H.M., 2003. "Estimation and Inference in Large Heterogeneous Panels with Cross Section Dependence," Cambridge Working Papers in Economics 0305, Faculty of Economics, University of Cambridge.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-02 (All new papers)
- NEP-ECM-2004-08-09 (Econometrics)
- NEP-ETS-2004-05-02 (Econometric Time Series)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Boston College Working Papers in Economics
440, Boston College Department of Economics.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
- Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988.
"Estimating Vector Autoregressions with Panel Data,"
Econometric Society, vol. 56(6), pages 1371-95, November.
- Tom Doan, . "RATS program to demonstrate IV estimation of VAR in panel data," Statistical Software Components RTZ00185, Boston College Department of Economics.
- Lee, K.C. & Pesaran, M.H., 1992.
"The Role of Sectoral Interactions in Wage Determination in the UK Economy,"
Cambridge Working Papers in Economics
9214, Faculty of Economics, University of Cambridge.
- Lee, Kevin C & Pesaran, M Hashem, 1993. "The Role of Sectoral Interactions in Wage Determination in the UK Economy," Economic Journal, Royal Economic Society, vol. 103(416), pages 21-55, January.
- Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
- Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation for Research in Economics, Yale University.
- Michael Binder & Cheng Hsiao & M. Hashem Pesaran, 2000.
"Estimation and Inference In Short Panel Vector Autoregressions with Unit Roots And Cointegration,"
CESifo Working Paper Series
374, CESifo Group Munich.
- Binder, Michael & Hsiao, Cheng & Pesaran, M. Hashem, 2005. "Estimation And Inference In Short Panel Vector Autoregressions With Unit Roots And Cointegration," Econometric Theory, Cambridge University Press, vol. 21(04), pages 795-837, August.
- Michael Binder, Cheng Hsiao, and M. Hashem Pesaran, 2001. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Computing in Economics and Finance 2001 36, Society for Computational Economics.
- Binder, M. & Hsaio, C. & Pesaran, M.H., 2000. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Cambridge Working Papers in Economics 0003, Faculty of Economics, University of Cambridge.
- Michael Binder & Cheng Hsiao & M. Hashem Pesaran, 2000. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Banco de Espaï¿½a Working Papers 0005, Banco de Espa�a.
- Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-3, International Conferences on Panel Data.
- Forni, Mario & Reichlin, Lucrezia, 1998.
"Let's Get Real: A Factor Analytical Approach to Disaggregated Business Cycle Dynamics,"
Review of Economic Studies,
Wiley Blackwell, vol. 65(3), pages 453-73, July.
- Mario Forni & Lucrezia Reichlin, 1998. "Let's get real: a factor analytical approach to disaggregated business cycle dynamics," ULB Institutional Repository 2013/10147, ULB -- Universite Libre de Bruxelles.
- Donald Robertson & James Symons, 2000. "Factor Residuals in SUR Regressions: Estimating Panels Allowing for Cross Sectional Correlation," CEP Discussion Papers dp0473, Centre for Economic Performance, LSE.
- Ahn, Seung Chan & Hoon Lee, Young & Schmidt, Peter, 2001. "GMM estimation of linear panel data models with time-varying individual effects," Journal of Econometrics, Elsevier, vol. 101(2), pages 219-255, April.
- Pesaran, M. Hashem & Smith, Ron, 1995.
"Estimating long-run relationships from dynamic heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 79-113, July.
- Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
- Swamy, P A V B, 1970.
"Efficient Inference in a Random Coefficient Regression Model,"
Econometric Society, vol. 38(2), pages 311-23, March.
- Tom Doan, . "SWAMY: RATS procedure to compute a GLS matrix weighted estimator for a panel data set," Statistical Software Components RTS00206, Boston College Department of Economics.
- Forni, Mario & Lippi, Marco, 1997. "Aggregation and the Microfoundations of Dynamic Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198288008.
- Hsiao, C. & Pesaran, M. H. & Tahmiscioglu, A. K., 1998. "Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models," Cambridge Working Papers in Economics 9804, Faculty of Economics, University of Cambridge.
- James H. Stock & Mark W. Watson, 1998. "Diffusion Indexes," NBER Working Papers 6702, National Bureau of Economic Research, Inc.
- Timothy G. Conley & Bill Dupor, 2003. "A Spatial Analysis of Sectoral Complementarity," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 311-352, April.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).
If references are entirely missing, you can add them using this form.