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Testing Factors In Cce

Author

Listed:
  • Nicholas Brown

    (Queen's University)

  • Joakim Westerlund

    (Lund University and Deakin University)

Abstract

One of the most popular estimators of interactive effects panel data models is the common correlated effects (CCE) approach, which uses the cross-sectional averages of the observables as proxies of the unobserved factors. The present paper proposes a simple test that is suitable for testing hypotheses about the factors in CCE and that is valid provided only that the number of cross-sectional units is large. The new test can be used to test if a subset of the averages is enough to proxy the factors, or if there are observable variables that capture the factors. The test can also be used sequentially to determine the smallest set of averages needed to proxy the factors.

Suggested Citation

  • Nicholas Brown & Joakim Westerlund, 2022. "Testing Factors In Cce," Working Paper 1491, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1491
    as

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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1491.pdf
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    References listed on IDEAS

    as
    1. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    2. Hyungsik Roger Moon & Martin Weidner, 2015. "Linear Regression for Panel With Unknown Number of Factors as Interactive Fixed Effects," Econometrica, Econometric Society, vol. 83(4), pages 1543-1579, July.
    3. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    4. Bai, Jushan & Ng, Serena, 2006. "Evaluating latent and observed factors in macroeconomics and finance," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 507-537.
    5. Fujikoshi, Yasunori, 2022. "High-dimensional consistencies of KOO methods in multivariate regression model and discriminant analysis," Journal of Multivariate Analysis, Elsevier, vol. 188(C).
    6. Joakim Westerlund & Yana Petrova & Milda Norkute, 2019. "CCE in fixed‐T panels," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(5), pages 746-761, August.
    7. Nicholas Brown & Kyle Butts & Joakim Westerlund, 2023. "Simple Difference-in-Differences Estimation in Fixed-T Panels," Papers 2301.11358, arXiv.org, revised Jun 2023.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Factor model selection; Interactive effects models; CCE estimation;
    All these keywords.

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