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Using information criteria to select averages in CCE

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  • Luca Margaritella
  • Joakim Westerlund

Abstract

SummaryIn the interactive effects panel data literature information criteria are commonly used to consistently determine which of the estimated principal components factors to include. The present paper shows that the same approach can be applied to factors estimated by taking the cross-sectional averages of the observables, as prescribed by the popular common correlated effects (CCE) approach. This should be useful to practitioners because at the moment there is no other theory that justifies the use of information criteria in CCE.

Suggested Citation

  • Luca Margaritella & Joakim Westerlund, 2023. "Using information criteria to select averages in CCE," The Econometrics Journal, Royal Economic Society, vol. 26(3), pages 405-421.
    • Handle: RePEc:oup:emjrnl:v:26:y:2023:i:3:p:405-421.
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