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ANOVA-HDFE: Fast Variance Decomposition with High-Dimensional Fixed Effects and an Application to Trade Flows

Author

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  • Hanna L. Adam
  • Mario Larch
  • Michael Nower

Abstract

Performing an analysis of variance (ANOVA) on a large dataset spanning many dimensions becomes computationally challenging or even infeasible. We develop a new, fast procedure, ANOVA-HDFE, which uses sequential linear regressions and builds on recent advances in regression analysis with high-dimensional fixed effects (HDFE). It accommodates both balanced and unbalanced settings with many categorical and continuous covariates, while also allowing for high-dimensional fixed effects. Applying ANOVA-HDFE to bilateral trade flows, we find that 60% of the variation is at the country or country-time level. Moreover, a substantial proportion of the pair-specific variation remains unexplained by standard trade cost proxy variables.

Suggested Citation

  • Hanna L. Adam & Mario Larch & Michael Nower, 2025. "ANOVA-HDFE: Fast Variance Decomposition with High-Dimensional Fixed Effects and an Application to Trade Flows," CESifo Working Paper Series 12055, CESifo.
    • Handle: RePEc:ces:ceswps:_12055
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    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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