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A two-stage estimator for heterogeneous panel models with common factors

Carolina Castagnetti (), Eduardo Rossi () and Lorenzo Trapani

Econometrics and Statistics, 2019, vol. 11, issue C, 63-82

Abstract: The estimation in a stationary heterogeneous panel model where unknown common factors are present is considered. A two-stage estimator is proposed and compared to existing alternative methods for the estimation of slope parameters in panels with a multifactor error structure. The asymptotic properties of this estimator are provided alongside the comparison of its finite-sample properties with those of a range of estimators by means of Monte Carlo experiments. The two-stage estimator affords a greater computational simplicity with respect to existing iterative estimators that fail to achieve convergence in a relevant number of cases considered. The proposed estimator is employed in the analysis of the determinants of Euro-denominated bonds in a framework of a heterogeneous panel data model with multifactor error structure.

Keywords: Large panels; Factor error structure; Principal components; Common regressors; Cross-section dependence (search for similar items in EconPapers)
Date: 2019
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Working Paper: A Two-Stage Estimator for Heterogeneous Panel Models with Common Factors (2014) Downloads
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DOI: 10.1016/j.ecosta.2017.10.005

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