Panel Data Analysis

Dr. Sunita Arora

Associate Professor
Government College for Women
Rohtak

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 References
by Damodar N.
Gujarati
by
Chris Brooks
by
Walter Enders
Econometrics by Example by Damodar
Gujarati
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 Types of Data
Cross sectional data: Data on one or more
variables collected at the same point in time.
Time Series data: Data on one or more variables
ordered chronologically.
Panel data: Combines features of both cross-
section and time series data i.e. data on more
than one cross sectional units for more than one
time period ordered chronologically.

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 Types of Panel Data
Four Types of Panels:
Balanced Panel: Number of time observations
are same for each cross sectional unit
Unbalanced Panel: Number of time observations
are not same for each cross sectional unit.
Short Panel: Number of cross sectional units is
more than time periods.
Long Panel: Number of cross sectional units is
less than time periods.

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 Importance of analysing Panel Data
If cross sectional data or time series data are
studied separately, effect of one at a time is
studied, if we want to study the effect of both
collectively, panel data analysis is required.
To construct and test more complicated
models, panel data analysis may be required.
Combination of both the cross sectional and
time series data enhances the quantity and
quality of data.
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Variables in the given data file: File taken from Companion
website of the book: Econometrics by example by
Damodar Gujarati
Time: It is the time presented in year.
Charity: The sum of cash and other property contributions
Income : Adjusted gross income
Price: one minus marginal income tax rate.
Individual: persons cross sectional id
Age: A dummy variable equal to one if the taxpayer is over 64,
and 0 otherwise.
MS: A dummy variable equal to one if taxpayer is married and 0
otherwise.
DEPS: Number of dependents claimed on the tax return.

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 Opening Data File for Panel Data
Analysis with eviews: eviews6
Basic Condition: we must have a series for cross
sectional data points and one series for time periods
Open the data file as usual
On the workfile window: Proc
Structure/resize current page
Change the option workfile structure file to dated
panel and name the cross sectional series and date
series
OK

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Opening Data File for Panel Data
Analysis with eviews: eviews7
Basic Condition: we must have a series for cross
sectional data points and one series for time periods in
years
Drag and drop file to eviews7 icon
Next
Again Next
Change the basic structure to dated panel
Name the cross sectional series
Name the date series.
Finish 10
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 Methods of Panel Data Analysis
Pooled OLS: In this method all the observations
are pooled ignoring the dual nature of time series
and cross-sectional data.
Fixed Effect Least Square dummy variable
model: in this model all the individuals or time
periods are allowed to have their own intercepts
Random Effects Model: intercepts values in this
method are assumed to be random as it is
assumed that the sample has been drawn
randomly from a large population.

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 Pooled OLS with eviews
Open the workfile with eviews without doing
any steps for panel data
Quick: Estimate Equation
charity c age income price deps ms
Method: Least square
OK

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Results of OLS (Ordinary Least Square ) Regression

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 Interpretation of Results of OLS
(Ordinary Least Square) Regression
It is expected that age, income, price and marital
status should have positive impact on the charitable
contribution whereas number of dependants should
have a negative impact. In results on slide number
16, it is observed that marital status has negative but
insignificant impact whereas number of dependents
has positive and significant impact. Low value of
Durbin Watson stat in the above results may be due
to model misspecifications rather than the serial
correlation
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 The Fixed Effects Least Square Dummy
Variable (LSDV) Model
Heterogeneity in cross sectional data may be
controlled by allowing each cross sectional unit
to have its own intercept.
In the charity function, the equation for this will
be:
c it
Bit B2 Age B3 Incomeit B4 Pr iceit
it

B5 Deps MS it u it
it

Where i = 1,2,,47; t = 1,2,,10.

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Fixed Effects LSDV Model with eviews:
Procedure of specifying the equation will be same as
in the Pooled Regression Model but in Panel options,
Fixed option will be selected in cross section.

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Results of Fixed Effects LSDV Model

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 Comparison of Pooled model with
fixed effect model
Restricted F test is used to check whether the fixed
effect model is better than Pooled regression

( Rur
2 2

F R r
)/m
(1 ) /(n k )
2
R ur

2 2
In the above equation Rur and R r are unrestricted
and restricted coefficients of determination, m is
number of omitted parameters, n is sample size, k is
number of parameters estimated in unrestricted model. 21
Applying Restricted F test to charity
example
From the results of OLS i.e. pooled regression
(restricted model) and LSDV (unrestricted model), F
will be

(0.7632 0.2245) / 46
F 20.672
(1 0.7632) / 418
For 46 degrees of numerator and 418 degrees of
freedom in the denominator, F is highly significant,
so LSDV is better than Pooled Regression. 22
 The Random effects model (REM) or
error components model(ECM)
In the random effect model it is assumed that
intercept of cross sectional unit has a mean
value of B1, so the equation for charity function
will be
c it
B1 B2 Age B3 Incomeit B4 Pr iceit
it

B5 Deps MS it wit
it

Where
w u
it i it

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Random Effects Model with eviews: Procedure of
specifying the equation will be same as in the Pooled
Regression Model but in Panel options, Random option
will be selected in cross section.

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Which model to Apply: Fixed Effect
Model or Random Effects Model
To decide which model is better out of the
two models Hausman test is applied:
Null Hypothesis: Random effects model is
appropriate.
If null hypothesis is rejected, Fixed effects
model is preferred to random effects model.

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Hausman test with eviews: View
Fixed/Random effect testing
correlated random effects-Hausman
test

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