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Robust standard errors in transformed likelihood estimation of dynamic panel data models with cross-sectional heteroskedasticity

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  • Hayakawa, Kazuhiko
  • Pesaran, M. Hashem

Abstract

This paper extends the transformed maximum likelihood approach for estimation of dynamic panel data models by Hsiao et al. (2002) to the case where the errors are cross-sectionally heteroskedastic. This extension is not trivial due to the incidental parameters problem and its implications for estimation and inference. We approach the problem by working with a mis-specified homoskedastic model, and then show that the transformed maximum likelihood estimator continues to be consistent even in the presence of cross-sectional heteroskedasticity. We also obtain standard errors that are robust to cross-sectional heteroskedasticity of unknown form. By means of Monte Carlo simulations, we investigate the finite sample behavior of the transformed maximum likelihood estimator and compare it with various GMM estimators proposed in the literature. Simulation results reveal that, in terms of median absolute errors and accuracy of inference, the transformed likelihood estimator outperforms the GMM estimators in almost all cases.

Suggested Citation

  • Hayakawa, Kazuhiko & Pesaran, M. Hashem, 2015. "Robust standard errors in transformed likelihood estimation of dynamic panel data models with cross-sectional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 188(1), pages 111-134.
  • Handle: RePEc:eee:econom:v:188:y:2015:i:1:p:111-134
    DOI: 10.1016/j.jeconom.2015.03.042
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    References listed on IDEAS

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    Cited by:

    1. Sebastian Kripfganz, 2016. "Quasi–maximum likelihood estimation of linear dynamic short-T panel-data models," Stata Journal, StataCorp LP, vol. 16(4), pages 1013-1038, December.
    2. Alexander Chudik & M. Hashem Pesaran, 2017. "A Bias-Corrected Method of Moments Approach to Estimation of Dynamic Short-T Panels," CESifo Working Paper Series 6688, CESifo Group Munich.
    3. Kripfganz, Sebastian & Schwarz, Claudia, 2013. "Estimation of Linear Dynamic Panel Data Models with Time-Invariant Regressors," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79756, Verein für Socialpolitik / German Economic Association.
    4. Hayakawa, Kazuhiko, 2016. "Improved GMM estimation of panel VAR models," Computational Statistics & Data Analysis, Elsevier, vol. 100(C), pages 240-264.
    5. D. Dragone & D. Raggi, 2018. "Testing Rational Addiction: When Lifetime is Uncertain, One Lag is Enough," Working Papers wp1119, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Dynamic panels; Cross-sectional heteroskedasticity; Monte Carlo simulation; Transformed MLE; GMM estimation;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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