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Dynamic Linear Panel Regression Models with Interactive Fixed Effects

Moon, HR; Weidner, M; (2017) Dynamic Linear Panel Regression Models with Interactive Fixed Effects. Econometric Theory , 33 (1) pp. 158-195. 10.1017/S0266466615000328. Green open access

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Abstract

We analyze linear panel regression models with interactive fixed effects and predetermined regressors, for example lagged-dependent variables. The first-order asymptotic theory of the least squares (LS) estimator of the regression coefficients is worked out in the limit where both the cross-sectional dimension and the number of time periods become large. We find two sources of asymptotic bias of the LS estimator: bias due to correlation or heteroscedasticity of the idiosyncratic error term, and bias due to predetermined (as opposed to strictly exogenous) regressors. We provide a bias-corrected LS estimator. We also present bias-corrected versions of the three classical test statistics (Wald, LR, and LM test) and show their asymptotic distribution is a χ2-distribution. Monte Carlo simulations show the bias correction of the LS estimator and of the test statistics also work well for finite sample sizes.

Type: Article
Title: Dynamic Linear Panel Regression Models with Interactive Fixed Effects
Open access status: An open access version is available from UCL Discovery
DOI: 10.1017/S0266466615000328
Publisher version: http://dx.doi.org/10.1017/S0266466615000328
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: social sciences, science & technology, physical sciences, economics, mathematics, interdisciplinary applications, social sciences, mathematical methods, statistics & probability, business & economics, mathematics, mathematical methods in social sciences, multifactor error structure, sample covariance-matrix, largest eigenvalue, bias reduction, number, inference, parameter, arbitrage, boundary, limit
UCL classification: UCL
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/1549660
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