Estimation and Inference in High-Dimensional Panel Data Models with Interactive Fixed Effects

Oliver Linton, Maximilian Rücker, Michael Vogt and Christopher Walsh

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We develop new econometric methods for estimation and inference in high-dimensional panel data models with interactive fixed effects. Our approach can be regarded as a non-trivial extension of the very popular common correlated effects (CCE) approach. Roughly speaking, we proceed as follows: We first construct a projection device to eliminate the unobserved factors from the model by applying a dimensionality reduction transform to the matrix of cross-sectionally averaged covariates. The unknown parameters are then estimated by applying lasso techniques to the projected model. For inference purposes, we derive a desparsified version of our lasso-type estimator. While the original CCE approach is restricted to the low-dimensional case where the number of regressors is small and fixed, our methods can deal with both lowand high-dimensional situations where the number of regressors is large and may even exceed the overall sample size. We derive theory for our estimation and inference methods both in the large-T-case, where the time series length T tends to infinity, and in the small-T-case, where T is a fixed natural number. Specifically, we derive the convergence rate of our estimator and show that its desparsified version is asymptotically normal under suitable regularity conditions. The theoretical analysis of the paper is complemented by a simulation study and an empirical application to characteristic based asset pricing.

Keywords: CCE estimator; Desparsified Lasso; high-dimensional model; interactive fixed effects; lasso; panel data (search for similar items in EconPapers)
JEL-codes: C13 C23 C55 (search for similar items in EconPapers)
Date: 2024-11-21
New Economics Papers: this item is included in nep-ecm
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Working Paper: Estimation and Inference in High-Dimensional Panel Data Models with Interactive Fixed Effects (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2467

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