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Identifying Distributions in a Panel Model with Heteroskedasticity: An Application to Earnings Volatility

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  • Irene Botosaru

    (Simon Fraser University)

Abstract

This paper considers a panel model with heteroskedasticity, where the parameter of interest is the probability density function of the heteroskedasticity. The nonparametric identification results are established sequentially via a deconvolution argument (in the first step) and solving a linear Fredholm integral equation of the first kind (in the second step). The identification results are constructive and give rise to nonparametric estimators. The model is relevant to the literature on earnings dynamics. Applied to data from the Panel Study of Income Dynamics (PSID), the method developed in this paper reveals a high degree of unobserved heterogeneity in earnings risk. In particular, the evolution over time of the quantiles of the conditional shock variance shows that it is those in the right tail of the distribution who experience the highest volatilities (particularly during recessions), with lower quantiles experiencing relatively constant volatilities during the business cycle. This type of heterogeneity may be relevant to the study of the cyclicality of income risk.

Suggested Citation

  • Irene Botosaru, 2017. "Identifying Distributions in a Panel Model with Heteroskedasticity: An Application to Earnings Volatility," Discussion Papers dp17-11, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp17-11
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    References listed on IDEAS

    as
    1. Botosaru, Irene & Sasaki, Yuya, 2018. "Nonparametric heteroskedasticity in persistent panel processes: An application to earnings dynamics," Journal of Econometrics, Elsevier, vol. 203(2), pages 283-296.
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    Cited by:

    1. Andrii Babii & Jean-Pierre Florens, 2017. "Is completeness necessary? Estimation in nonidentified linear models," Papers 1709.03473, arXiv.org, revised Nov 2021.

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    More about this item

    Keywords

    Earnings dynamics; panel data; deconvolution; integral equation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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