An Adjusted Profile Likelihood for Non-Stationary Panel Data Models with Incidental Parameters
AbstractWe calculate the exact bias of the profile score for the first-order autoregressive parameter, ρ, in a Gaussian N ×T panel data model with arbitrary initial conditions and arbitrary heterogeneity in intercepts, trends and error variances. The bias is a polynomial in ρ and does not depend on the initial values or the incidental parameters. Subtracting its integral from the profile loglikelihood leads to an adjusted profile likelihood which, in the case without incidental trends and error variances, coincides with Lancaster’s (2002) marginal posterior density for ρ. We show, largely by simulation, that the expected adjusted profile loglikelihood (and hence the expected marginal posterior log-density), in addition to attaining a local maximum on [−1, 1] at the true value of ρ, may attain a global maximum at 1. The latter occurs when the initial values are strong inliers relative to the stationary distribution, which leads to weakly informative data when the autoregressive parameter is moderate to large, even with very large N.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven in its series Open Access publications from Katholieke Universiteit Leuven with number urn:hdl:123456789/161733.
Date of creation: Mar 2007
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Fixed effects; incidental parameters; dynamic panel; heterogeneity; panel unit root; bias correction; profile score;
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