Factor residuals in SUR regressions: estimating panels allowing for cross sectional correlation

Donald Robertson and James Symons

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper describes a method for estimating panels by imposing a factor structure on the residuals. The method allows SUR estimation of panel models by providing a full-rank estimator of the system covariance matrix when the usual estimate is rank-deficient. We charactersie completely the circumstances when this is possible. When the usual estimator is of full rank, our procedure provides a more parsimonious representation of the covariance matrix, which can lead to efficiency gains in finite samples. Monte Carlo analysis of convergence regressions and PPP regressions in the Heston-Summers data-set indicates that the proposed estimator has better performance in terms of RMSE and bias than standard panel or SUR estimators (where available), as well as offering unbiased inference.

Keywords: Panel data; cross sectional correlation; factor analysis (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2000-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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http://eprints.lse.ac.uk/20163/ Open access version. (application/pdf)

Related works:
Working Paper: Factor Residuals in SUR Regressions: Estimating Panels Allowing for Cross Sectional Correlation (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:20163

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