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On Maximum Likelihood Estimation of Dynamic Panel Data Models

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  • Maurice J.G. Bun
  • Martin A. Carree
  • Artūras Juodis

Abstract

We analyze the finite sample properties of maximum likelihood estimators for dynamic panel data models. In particular, we consider Transformed Maximum Likelihood (TML) and Random effects Maximum Likelihood (RML) estimation. We show that TML and RML estimators are solutions to a cubic first-order condition in the autoregressive parameter. Furthermore, in finite samples both likelihood estimators might lead to a negative estimate of the variance of the individual specific effects. We consider different approaches taking into account the non-negativity restriction for the variance. We show that these approaches may lead to a boundary solution different from the unique global unconstrained maximum. In an extensive Monte Carlo study we find that this boundary solution issue is non-negligible for small values of T and that different approaches might lead to substantially different finite sample properties. Furthermore, we find that the Likelihood Ratio statistic provides size control in small samples, albeit with low power due to the flatness of the log-likelihood function. We illustrate these issues modeling U.S. state level unemployment dynamics.
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  • Maurice J.G. Bun & Martin A. Carree & Artūras Juodis, 2017. "On Maximum Likelihood Estimation of Dynamic Panel Data Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(4), pages 463-494, August.
  • Handle: RePEc:bla:obuest:v:79:y:2017:i:4:p:463-494
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    File URL: http://hdl.handle.net/10.1111/obes.12156
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    Cited by:

    1. Mehic, Adrian, 2020. "Half-panel jackknife estimation for dynamic panel models," Economics Letters, Elsevier, vol. 190(C).
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    3. Adrian Mehic, 2021. "FDML versus GMM for Dynamic Panel Models with Roots Near Unity," JRFM, MDPI, vol. 14(9), pages 1-9, August.
    4. Arturas Juodis, 2015. "Iterative Bias Correction Procedures Revisited: A Small Scale Monte Carlo Study," UvA-Econometrics Working Papers 15-02, Universiteit van Amsterdam, Dept. of Econometrics.
    5. Hakim Lyngstadaas, 2020. "Packages or systems? Working capital management and financial performance among listed U.S. manufacturing firms," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(4), pages 403-450, December.
    6. Juodis, Artūras & Poldermans, Rutger W., 2021. "Backward mean transformation in unit root panel data models," Economics Letters, Elsevier, vol. 201(C).

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