Dynamic Panels with Threshold Effect and Endogeneity

Myung Hwan Seo and Yongcheol Shin

STICERD - Econometrics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: This paper addresses an important and challenging issue as how best to model nonlinear asymmetric dynamics and cross-sectional heterogeneity, simultaneously, in the dynamic threshold panel data framework, in which both threshold variable and regressors are allowed to be endogenous. Depending on whether the threshold variable is strictly exogenous or not, we propose two different estimation methods: first-differenced two-step least squares and first-differenced GMM. The former exploits the fact that the threshold variable is strictly exogenous to achieve the super-consistency of the threshold estimator. We provide asymptotic distributions of both estimators. The bootstrap-based test for the presence of threshold effect as well as the exogeneity test of the threshold variable are also developed. Monte Carlo studies provide a support for our theoretical predictions. Finally, using the UK and the US company panel data, we provide two empirical applications investigating an asymmetric sensitivity of investment to cash flows and an asymmetric dividend smoothing.

Keywords: Dynamic Panel Threshold Models; Endogenous Threshold Effects and Regressors; FD-GMM and FD-2SLS Estimation; Linearity Test; Exogeneity Test; Investment and Dividend Smoothing. (search for similar items in EconPapers)
JEL-codes: C13 C33 G31 G35 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Dynamic panels with threshold effect and endogeneity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stiecm:577

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