Estimation of Fractionally Integrated Panels with Fixed Effects and Cross-Section Dependence

Yunus Emre Ergemen () and Carlos Velasco
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Yunus Emre Ergemen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We consider large N, T panel data models with fixed effects, common factors allowing cross-section dependence, and persistent data and shocks, which are assumed fractionally integrated. In a basic setup, the main interest is on the fractional parameter of the idiosyncratic component, which is estimated in first differences after factor removal by projection on the cross-section average. The pooled conditional-sum-of-squares estimate is root-NT consistent but the normal asymptotic distribution might not be centered, requiring the time series dimension to grow faster than the cross-section size for correction. Generalizing the basic setup to include covariates and heterogeneous parameters, we propose individual and common-correlation estimates for the slope parameters, while error memory parameters are estimated from regression residuals. The two parameter estimates are root-T consistent and asymptotically normal and mutually uncorrelated, irrespective of possible cointegration among idiosyncratic components. A study of small-sample performance and an empirical application to realized volatility persistence are included.

Keywords: Fractional cointegration; factor models; long memory; realized volatility (search for similar items in EconPapers)
JEL-codes: C22 C23 (search for similar items in EconPapers)
Pages: 73
Date: 2015-08-17
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ger
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Estimation of fractionally integrated panels with fixed effects and cross-section dependence (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2015-35

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