Factor and factor loading augmented estimators for panel regression

Jad Beyhum () and Eric Gautier
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Jad Beyhum: ORSTAT - Operations Research and Business Statistics - KU Leuven - Catholic University of Leuven = Katholieke Universiteit Leuven

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Abstract: This paper considers linear panel data models where the dependence of the regressors and the unobservables is modelled through a factor structure. The asymptotic setting is such that the number of time periods and the sample size both go to infinity. Non-strong factors are allowed and the number of factors can grow to infinity with the sample size. We study a class of two-step estimators of the regression coefficients. In the first step, factors and factor loadings are estimated. Then, the second step corresponds to the panel regression of the outcome on the regressors and the estimates of the factors and the factor loadings from the first step. Different methods can be used in the first step while the second step is unique. We derive sufficient conditions on the first-step estimator and the data generating process under which the two-step estimator is asymptotically normal. Assumptions under which using an approach based on principal components analysis in the first step yields an asymptotically normal estimator are also given. The two-step procedure exhibits good finite sample properties in simulations.

Keywords: panel data; interactive fixed effects; factor models; flexible unobserved heterogeneity; principal components analysis (search for similar items in EconPapers)
Date: 2020-11-23
New Economics Papers: this item is included in nep-ecm and nep-ore
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