The Asymptotics for Panel Models with Common Shocks

Chihwa Kao (), Lorenzo Trapani () and Giovanni Urga ()
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Lorenzo Trapani: Cass Business School and Bergamo University
Giovanni Urga: Cass Business School

No 77, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

Abstract: This paper develops a novel asymptotic theory for panel models with common shocks. We assume that contemporaneous correlation can be generated by both the presence of common regressors among units and weak spatial dependence among the error terms. Several characteristics of the panel are considered: cross sectional and time series dimensions can either be fixed or large; factors can either be observable or unobservable; the factor model can describe either cointegration relationship or a spurious regression, and we also consider the stationary case. We derive the rate of convergence and the distribution limits for the ordinary least squares (OLS) estimates of the model parameters under all the aforementioned cases.

Keywords: cross-sectional dependence; common shocks; nonstationary panel (search for similar items in EconPapers)
JEL-codes: C13 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: Written 2006-02
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Persistent link: http://EconPapers.repec.org/RePEc:max:cprwps:77

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