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Estimating Aggregate Relationships in Panel Data via the LASSO

Margaritella, Luca LU and Westerlund, Joakim LU (2025) In Oxford Bulletin of Economics and Statistics
Abstract
This article is concerned with the estimation of aggregate relationships among a potentially large number of panel data variables in the presence of unobserved heterogeneity in the form of interactive effects, an empirically very relevant scenario that has not been considered before. One of our findings is that if the regressors load on the same set of latent factors as the dependent variable, which seems a priori likely since many variables are co-moving, the aggregation automatically accounts for the unobserved heterogeneity. In order to also account for the many regressors, the aggregate model is estimated using a version of LASSO. It is shown that under suitable regulatory conditions, the estimator is oracle efficient and selection... (More)
This article is concerned with the estimation of aggregate relationships among a potentially large number of panel data variables in the presence of unobserved heterogeneity in the form of interactive effects, an empirically very relevant scenario that has not been considered before. One of our findings is that if the regressors load on the same set of latent factors as the dependent variable, which seems a priori likely since many variables are co-moving, the aggregation automatically accounts for the unobserved heterogeneity. In order to also account for the many regressors, the aggregate model is estimated using a version of LASSO. It is shown that under suitable regulatory conditions, the estimator is oracle efficient and selection consistent, properties that are verified in small samples using Monte Carlo simulations. The empirical usefulness of the estimator is illustrated using as an example the gravity equation of trade. (Less)
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Contribution to journal
publication status
epub
subject
keywords
aggregation, common factors, interactive effects, LASSO, trade
in
Oxford Bulletin of Economics and Statistics
publisher
Wiley-Blackwell
ISSN
1468-0084
DOI
10.1111/obes.70009
language
English
LU publication?
yes
id
7ecdd9c2-fbec-4e28-98c3-6ae141848cb2
date added to LUP
2025-08-25 09:58:07
date last changed
2025-08-26 09:27:01
@article{7ecdd9c2-fbec-4e28-98c3-6ae141848cb2,
  abstract     = {{This article is concerned with the estimation of aggregate relationships among a potentially large number of panel data variables in the presence of unobserved heterogeneity in the form of interactive effects, an empirically very relevant scenario that has not been considered before. One of our findings is that if the regressors load on the same set of latent factors as the dependent variable, which seems a priori likely since many variables are co-moving, the aggregation automatically accounts for the unobserved heterogeneity. In order to also account for the many regressors, the aggregate model is estimated using a version of LASSO. It is shown that under suitable regulatory conditions, the estimator is oracle efficient and selection consistent, properties that are verified in small samples using Monte Carlo simulations. The empirical usefulness of the estimator is illustrated using as an example the gravity equation of trade.}},
  author       = {{Margaritella, Luca and Westerlund, Joakim}},
  issn         = {{1468-0084}},
  keywords     = {{aggregation; common factors; interactive effects; LASSO; trade}},
  language     = {{eng}},
  month        = {{08}},
  publisher    = {{Wiley-Blackwell}},
  series       = {{Oxford Bulletin of Economics and Statistics}},
  title        = {{Estimating Aggregate Relationships in Panel Data via the LASSO}},
  url          = {{http://dx.doi.org/10.1111/obes.70009}},
  doi          = {{10.1111/obes.70009}},
  year         = {{2025}},
}