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A Varying Coefficient Model with Two-way Fixed Effects and Different Smoothing Variables

Author

Listed:
  • Taining Wang

    (Capital University of Economics and Business)

  • Feng Yao

    (West Virginia University, Department of Economics)

Abstract

We propose a varying coefficient regression model for panel data that controls for both latent heterogeneities in cross-sectional units and unobserved common shocks over time. The model allows different smoothing variables to enter through either a stand-alone function or a coefficient function. Without requiring a normalization of the fixed effects, we propose a two-step estimator. First, we estimate the varying coefficients with the pilot series-based estimators, eliminating fixed effects though differencing. Second, we perform a one-step kernel backfitting to improve the estimation efficiency. We demonstrate through Monte-Carlo simulations that our estimators are computationally efficient and perform well relative to a profile-based kernel estimator.

Suggested Citation

  • Taining Wang & Feng Yao, 2021. "A Varying Coefficient Model with Two-way Fixed Effects and Different Smoothing Variables," Working Papers 21-01, Department of Economics, West Virginia University.
    • Handle: RePEc:wvu:wpaper:21-01
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    File URL: https://researchrepository.wvu.edu/cgi/viewcontent.cgi?article=1051&context=econ_working-papers
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    More about this item

    Keywords

    semiparametric model; varying coefficient model; different smoothing variables; two-way fixed effects; series estimation; kernel backfitting;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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