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Inference on Factor Structures in Heterogeneous Panels

  • Carolina Castagnetti

    (Department of Economics and Management, University of Pavia)

  • Eduardo Rossi

    (Department of Economics and Management, University of Pavia)

  • Lorenzo Trapani

    (Cass Business School, City University London)

This paper develops an estimation and testing framework for a stationary large panel model with observable regressors and unobservable common factors. We allow for slope heterogeneity and for correlation between the common factors and the regressors. We propose a two stage estimation procedure for the unobservable common factors and their loadings, based on applying Pesaran’s (2006) CCE estimator and the Principal Component estimator. We also develop two tests for the null of no factor structure: one for the null that loadings are cross sectionally homogeneous, and one for the null that common factors are homogeneous over time. Our tests are based on using extremes of the estimated loadings and common factors. The test statistics have an asymptotic Gumbel distribution under the null, and have power versus alternatives where only one loading or common factor differs from the others. Monte Carlo evidence shows that the tests have the correct size and good power.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0002.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 002.

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Length: 61 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:pav:demwpp:demwp0002
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  1. Declan French & Colin O'Hare, 2013. "A Dynamic Factor Approach to Mortality Modeling," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(7), pages 587-599, November.
  2. Chudik, Alexander & Pesaran, Hashem & Tosetti, Elisa, 2009. "Weak and strong cross section dependence and estimation of large panels," Working Paper Series 1100, European Central Bank.
  3. Joakim Westerlund & Wolfgang Hess, 2011. "A new poolability test for cointegrated panels," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(1), pages 56-88, January/F.
  4. Hashem Pesaran, M. & Yamagata, Takashi, 2008. "Testing slope homogeneity in large panels," Journal of Econometrics, Elsevier, vol. 142(1), pages 50-93, January.
  5. Markus Eberhardt & Christian Helmers & Hubert Strauss, 2013. "Do Spillovers Matter When Estimating Private Returns to R&D?," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 436-448, May.
  6. Pesaran, M.H. & Tosetti, E., 2007. "Large Panels with Common Factors and Spatial Correlations," Cambridge Working Papers in Economics 0743, Faculty of Economics, University of Cambridge.
  7. Markus Eberhardt & Francis Teal, 2013. "No Mangoes in the Tundra: Spatial Heterogeneity in Agricultural Productivity Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(6), pages 914-939, December.
  8. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037.
  9. Corradi, Valentina, 1999. "Deciding Between I(0) And I(1) Via Flil-Based Bounds," Econometric Theory, Cambridge University Press, vol. 15(05), pages 643-663, October.
  10. George Kapetanios, 2003. "Determining the Poolability of Individual Series in Panel Datasets," Working Papers 499, Queen Mary University of London, School of Economics and Finance.
  11. M. Hashem Pesaran & Elisa Tosetti, 2011. "Large panels with common factors and spatial correlation," Post-Print hal-00796743, HAL.
  12. Peter Hall & Hugh Miller, 2010. "Bootstrap confidence intervals and hypothesis tests for extrema of parameters," Biometrika, Biometrika Trust, vol. 97(4), pages 881-892.
  13. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation for Research in Economics, Yale University.
  14. Pesaran, Hashem & Chudik, Alexander, 2013. "Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors," Cambridge Working Papers in Economics 1317, Faculty of Economics, University of Cambridge.
  15. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
  16. Carolina Castagnetti & Eduardo Rossi & Lorenzo Trapani, 2012. "Inference on Factor Structures in Heterogeneous Panels," DEM Working Papers Series 002, University of Pavia, Department of Economics and Management.
  17. Sarafidis, Vasilis & Yamagata, Takashi & Robertson, Donald, 2009. "A test of cross section dependence for a linear dynamic panel model with regressors," Journal of Econometrics, Elsevier, vol. 148(2), pages 149-161, February.
  18. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  19. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series 1331, CESifo Group Munich.
  20. Jenish, Nazgul & Prucha, Ingmar R., 2012. "On spatial processes and asymptotic inference under near-epoch dependence," Journal of Econometrics, Elsevier, vol. 170(1), pages 178-190.
  21. M. Hashem Pesaran & Elisa Tosetti, 2011. "Large panels with common factors and spatial correlation," Post-Print peer-00796743, HAL.
  22. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, 07.
  23. Carolina Castagnetti & Eduardo Rossi & Lorenzo Trapani, 2014. "Testing for no factor structures: on the use of average-type and Hausman-type statistics," DEM Working Papers Series 092, University of Pavia, Department of Economics and Management.
  24. Carolina Castagnetti & Eduardo Rossi, 2013. "Euro Corporate Bond Risk Factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(3), pages 372-391, 04.
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