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On the Role of the Rank Condition in CCE Estimation of Factor-Augmented Panel Regressions

Westerlund, Joakim LU ; Reese, Simon LU and Karabiyik, Hande LU (2017) In Journal of Econometrics 197(1). p.60-64
Abstract
A popular approach to factor-augmented panel regressions is the common correlatedeffects (CCE) estimator of Pesaran (Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967–1012, 2006). This paper points to a problem with the CCE approach that appears in the empirically relevant case when the number of factors is strictly less than the number of observables used in their estimation. Specifically, the use of too many observables causes the second moment matrix of the estimated factors to become asymptotically singular, an issue that has not yet been appropriately accounted for. The purpose of the present paper is to fill this gap in the literature.
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Factor-augmented panel regression, CCE estimation, Moore–Penrose inverse
in
Journal of Econometrics
volume
197
issue
1
pages
5 pages
publisher
Elsevier
external identifiers
  • scopus:85007523873
  • wos:000393932700004
ISSN
0304-4076
DOI
10.1016/j.jeconom.2016.10.006
language
English
LU publication?
yes
id
4834cd08-19ce-4f38-ae01-7e118b938417
date added to LUP
2016-10-28 11:54:47
date last changed
2018-01-07 11:32:29
@article{4834cd08-19ce-4f38-ae01-7e118b938417,
  abstract     = {A popular approach to factor-augmented panel regressions is the common correlatedeffects (CCE) estimator of Pesaran (Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967–1012, 2006). This paper points to a problem with the CCE approach that appears in the empirically relevant case when the number of factors is strictly less than the number of observables used in their estimation. Specifically, the use of too many observables causes the second moment matrix of the estimated factors to become asymptotically singular, an issue that has not yet been appropriately accounted for. The purpose of the present paper is to fill this gap in the literature.},
  author       = {Westerlund, Joakim and Reese, Simon and Karabiyik, Hande},
  issn         = {0304-4076},
  keyword      = {Factor-augmented panel regression,CCE estimation,Moore–Penrose inverse},
  language     = {eng},
  number       = {1},
  pages        = {60--64},
  publisher    = {Elsevier},
  series       = {Journal of Econometrics},
  title        = {On the Role of the Rank Condition in CCE Estimation of Factor-Augmented Panel Regressions},
  url          = {http://dx.doi.org/10.1016/j.jeconom.2016.10.006},
  volume       = {197},
  year         = {2017},
}