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Linear Regression for Panel with Unknown Number of Factors as Interactive Fixed Effects

Moon, HR; Weidner, M; (2015) Linear Regression for Panel with Unknown Number of Factors as Interactive Fixed Effects. Econometrica , 83 (4) 1543- 1579. 10.3982/ECTA9382. Green open access

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Abstract

In this paper, we study the least squares (LS) estimator in a linear panel regression model with unknown number of factors appearing as interactive fixed effects. Assuming that the number of factors used in estimation is larger than the true number of factors in the data, we establish the limiting distribution of the LS estimator for the regression coefficients as the number of time periods and the number of cross-sectional units jointly go to infinity. The main result of the paper is that under certain assumptions, the limiting distribution of the LS estimator is independent of the number of factors used in the estimation as long as this number is not underestimated. The important practical implication of this result is that for inference on the regression coefficients, one does not necessarily need to estimate the number of interactive fixed effects consistently

Type: Article
Title: Linear Regression for Panel with Unknown Number of Factors as Interactive Fixed Effects
Open access status: An open access version is available from UCL Discovery
DOI: 10.3982/ECTA9382
Publisher version: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Language: English
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1343815
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