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Improved efficiency (unbiased estimator with smallest variance for all possible true parameter values)
you can test new hypothesis on individual behavior or policy changes that affect several entities
Time dimension
code ALB ALB ALB ALB ALB ALB ALB ALB ALB ALB DZA DZA DZA DZA DZA DZA DZA DZA DZA DZA
year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
gdp 6,75179343 -11,4142038 -27,5896031 -5,69153612 11,1974627 9,1941036 7,55757392 7,73893405 -8,06352119
missing
2,29575915 -3,72084675 -3,55414336 -0,79384221 -4,35723136 -3,31007521 1,59040861 1,58921549 -1,03429441 1,44857954
sav pop 20,9783993 -13,0284996 -75,4131012 -33,6716003 -9,88263035 -3,94799995 -11,8118 -9,25912952 -6,69585991 -1,66910005 27,4666996 36,6562004 32,3755989 27,8384991 27,0359993 28,4333992 31,4230003 32,1985016 27,0669003 31,6912003
1,6 -0,2 -1,6 -1,4 0,2 1,2 1,3 1,2 1,1 1,1 2,5 2,4 2,4 2,3 2,2 2,2 2,2 2,2 2,1 2,1
Pooled regression
Combine both dimensions in one data set Neglect time and cross-sectional structure Run following regression with POLS/SOLS
gdpit ! E Fsavit Kpopit eit
Pooled regression
. reg gdp pop sav variables pop sav Adjusted R2 F-test Observations coefficients -1.73028 0.1766935 0.10 6.20 (0.003) 95 t-values -1.95 3.51 p-values 0.055 0.001
Autocorrelation
Now time dimension; hence, correlation among successive residuals possible This affects t and p-values violates assumption E(eiteit-j)=0 for all j{0 How can we test for this problem? What can we do if we detect autocorrelation?
Autocorrelation
Stata should know that the data set is a panel Command: tsset (i) year note: i=cross-section Normal test commands for autocorrelation do not work; hence, develop own test (several procedures!)
Hint: Construction of Lags with Panel Data After regress command predict r, resid Then construct lagged residual gen r1=r[_n-1] Problem: Panel structure; thus, replace lagged values for first year (1990 in our case) replace r1=. if year==1990 Note: t-value reaches 4.62!
. xtgls gdp sav pop, corr(ar1) panels(hetero) force variables constant pop sav Wald chi2 Observations coefficients -0.2978 -0.3767 0.1012 3.41 (0.182) 95 z-values -0.22 -0.76 1.82 p-values 0.825 0.450 0.068
Pitfalls of GLS
Specification of form of autocorrelation and heteroscedasticity important If specification bad estimates are biased General: I would prefer this procedure for larger samples because more parameters need to be estimated Can be used to test for instance panel-level heteroscedasticity!
Individual effects are random Estimation with GLS or maximum likelihood procedure After estimation: Breusch-Pagan (1980) test or likelihood ratio test whether random effects should be assumed
Test whether random effects should be used LM test 0.11 (0.736) LR test 0.00 (1.000)
Additional Issues
Stochastic trends in panel data
Spurious regressions Unit-root tests panel based; thus, more observations First differencing or deviation from common trends