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Negative variance estimates in panel data models

Author

Listed:
  • Laura Magazzini

    (Department of Economics (University of Verona))

  • Giorgio Calzolari

    (University of Florence)

Abstract

Negative values for estimated variances can arise in a panel data context. Empirical and theoretical literature dismisses the problem as not serious and a practical solution is to replace negative variances by its boundary value, i.e. zero. While this is not a concern when the individual variance components is "small" with respect to idiosyncratic variance component (making it indistinguishable from zero in practice), we claim that a negative estimated variance can also arise with a "large" individual variance component, when the orthogonality condition between the individual effects and regressors fails. Estimation problems are considered in the (feasible) generalized least squares and maximum likelihood frameworks.

Suggested Citation

  • Laura Magazzini & Giorgio Calzolari, 2010. "Negative variance estimates in panel data models," Working Papers 15/2010, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:15/2010
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    References listed on IDEAS

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    3. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    4. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291.
    5. Maddala, G S, 1971. "The Use of Variance Components Models in Pooling Cross Section and Time Series Data," Econometrica, Econometric Society, vol. 39(2), pages 341-358, March.
    6. Swamy, P A V B & Arora, S S, 1972. "The Exact Finite Sample Properties of the Estimators of Coefficients in the Error Components Regression Models," Econometrica, Econometric Society, vol. 40(2), pages 261-275, March.
    7. Amemiya, Takeshi, 1971. "The Estimation of the Variances in a Variance-Components Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(1), pages 1-13, February.
    8. Wallace, T D & Hussain, Ashiq, 1969. "The Use of Error Components Models in Combining Cross Section with Time Series Data," Econometrica, Econometric Society, vol. 37(1), pages 55-72, January.
    9. Fuller, Wayne A. & Battese, George E., 1974. "Estimation of linear models with crossed-error structure," Journal of Econometrics, Elsevier, vol. 2(1), pages 67-78, May.
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    Cited by:

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    2. Xiaobing Le & Xinxin Shao & Kuo Gao, 2023. "The Relationship between Urbanization and Consumption Upgrading of Rural Residents under the Sustainable Development: An Empirical Study Based on Mediation Effect and Threshold Effect," Sustainability, MDPI, vol. 15(10), pages 1-19, May.

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    More about this item

    Keywords

    Panel data; random effect estimation; negative variances; maximum likelihood;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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