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Efficient estimation of heterogeneous coefficients in panel data models with common shock

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  • Li, Kunpeng
  • Lu, Lina

Abstract

This paper investigates efficient estimation of heterogeneous coefficients in panel data models with common shocks, which have been a particular focus of recent theoretical and empirical literature. We propose a new two-step method to estimate the heterogeneous coefficients. In the first step, the maximum likelihood (ML) method is first conducted to estimate the loadings and idiosyncratic variances. The second step estimates the heterogeneous coefficients by using the structural relations implied by the model and replacing the unknown parameters with their ML estimates. We establish the asymptotic theory of our estimator, including consistency, asymptotic representation, and limiting distribution. The two-step estimator is asymptotically efficient in the sense that it has the same limiting distribution as the infeasible generalized least squares (GLS) estimator. Intensive Monte Carlo simulations show that the proposed estimator performs robustly in a variety of data setups.

Suggested Citation

  • Li, Kunpeng & Lu, Lina, 2014. "Efficient estimation of heterogeneous coefficients in panel data models with common shock," MPRA Paper 59312, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59312
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    References listed on IDEAS

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    More about this item

    Keywords

    Factor analysis; Block diagonal covariance; Panel data models; Common shocks; Maximum likelihood estimation; heterogeneous coefficients; Inferential theory;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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