INTERACTIVE EFFECTS PANEL DATA MODELS with GENERAL FACTORS and REGRESSORS

Bin Peng*, Liangjun Su, Joakim Westerlund, Yanrong Yang

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    Abstract

    This paper considers a model with general regressors and unobservable common factors. An estimator based on iterated principal component analysis is proposed, which is shown to be not only asymptotically normal, but under certain conditions also free of the otherwise so common asymptotic incidental parameters bias. Interestingly, the conditions required to achieve unbiasedness become weaker the stronger the trends in the factors, and if the trending is strong enough, unbiasedness comes at no cost at all. The approach does not require any knowledge of how many factors there are, or whether they are deterministic or stochastic. The order of integration of the factors is also treated as unknown, as is the order of integration of the regressors, which means that there is no need to pre-test for unit roots, or to decide on which deterministic terms to include in the model.

    Original languageEnglish
    Pages (from-to)1-17
    Number of pages17
    JournalEconometric Theory
    DOIs
    Publication statusPublished - 5 Sept 2023

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