Estimation of Factor-Augmented Panel Regressions with Weakly Influential Factors

Joakim Westerlund and Simon Reese ()
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Simon Reese: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden, http://www.nek.lu.se/en/contact/NEK-SOR

No 2014:8, Working Papers from Lund University, Department of Economics

Abstract: The use of factor-augmented panel regressions has become very popular in recent years. Existing methods for such regressions require that the common factors are strong, such that their cumulative loadings rise proportionally to the number of cross-sectional units, which of course need not be the case in practice. Motivated by this, the current paper offers an indepth analysis of the effect of non-strong factors on two of the most popular estimators for factor-augmented regressions, namely, principal components (PC) and common correlated effects (CCE).

Keywords: Non-strong common factors; factor-augmented panel regressions; common factor models (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 (search for similar items in EconPapers)
Pages: 86 pages
Date: 2014-02-13, Revised 2014-01-27
New Economics Papers: this item is included in nep-ecm
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Published as Westerlund, Joakim and Simon Reese, 'Estimation of Factor-Augmented Panel Regressions with Weakly Influential Factors' in Econometric Reviews, 2017, pages 1-65.

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Journal Article: Estimation of factor-augmented panel regressions with weakly influential factors (2018)
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