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Interactive Effects Panel Data Models With General Factors And Regressors

Author

Listed:
  • Peng, Bin
  • Su, Liangjun
  • Westerlund, Joakim
  • Yang, Yanrong

Abstract

This paper considers a model with general regressors and unobservable common factors. An estimator based on iterated principal component analysis is proposed, which is shown to be not only asymptotically normal, but under certain conditions also free of the otherwise so common asymptotic incidental parameters bias. Interestingly, the conditions required to achieve unbiasedness become weaker the stronger the trends in the factors, and if the trending is strong enough, unbiasedness comes at no cost at all. The approach does not require any knowledge of how many factors there are, or whether they are deterministic or stochastic. The order of integration of the factors is also treated as unknown, as is the order of integration of the regressors, which means that there is no need to pre-test for unit roots, or to decide on which deterministic terms to include in the model.

Suggested Citation

  • Peng, Bin & Su, Liangjun & Westerlund, Joakim & Yang, Yanrong, 2025. "Interactive Effects Panel Data Models With General Factors And Regressors," Econometric Theory, Cambridge University Press, vol. 41(2), pages 472-488, April.
    • Handle: RePEc:cup:etheor:v:41:y:2025:i:2:p:472-488_7
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    Cited by:

    1. Bi, Daning & Chang, Le & Yang, Yanrong, 2025. "Iterative Complement-clustering PCA: Uncovering latent industry structures in stock returns," Economics Letters, Elsevier, vol. 256(C).
    2. Hou, Li & Jin, Baisuo & Wu, Yuehua, 2024. "Estimation and variable selection for high-dimensional spatial dynamic panel data models," Journal of Econometrics, Elsevier, vol. 238(2).
    3. Georg Keilbar & Juan M. Rodriguez-Poo & Alexandra Soberon & Weining Wang, 2022. "A projection based approach for interactive fixed effects panel data models," Papers 2201.11482, arXiv.org, revised Feb 2025.

    More about this item

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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