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A two-stage estimator for heterogeneous panel models with common factors

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  • Castagnetti, Carolina
  • Rossi, Eduardo
  • Trapani, Lorenzo

Abstract

The estimation in a stationary heterogeneous panel model where unknown common factors are present is considered. A two-stage estimator is proposed and compared to existing alternative methods for the estimation of slope parameters in panels with a multifactor error structure. The asymptotic properties of this estimator are provided alongside the comparison of its finite-sample properties with those of a range of estimators by means of Monte Carlo experiments. The two-stage estimator affords a greater computational simplicity with respect to existing iterative estimators that fail to achieve convergence in a relevant number of cases considered. The proposed estimator is employed in the analysis of the determinants of Euro-denominated bonds in a framework of a heterogeneous panel data model with multifactor error structure.

Suggested Citation

  • Castagnetti, Carolina & Rossi, Eduardo & Trapani, Lorenzo, 2019. "A two-stage estimator for heterogeneous panel models with common factors," Econometrics and Statistics, Elsevier, vol. 11(C), pages 63-82.
    • Handle: RePEc:eee:ecosta:v:11:y:2019:i:c:p:63-82
    DOI: 10.1016/j.ecosta.2017.10.005
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    Cited by:

    1. Bin Peng & Liangjun Su & Joakim Westerlund & Yanrong Yang, 2021. "Interactive Effects Panel Data Models with General Factors and Regressors," Papers 2111.11506, arXiv.org.
    2. Castagnetti, Carolina, 2018. "A novel approach for testing the parity relationship between CDS and credit spread," Economics Letters, Elsevier, vol. 172(C), pages 115-117.

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    More about this item

    Keywords

    Large panels; Factor error structure; Principal components; Common regressors; Cross-section dependence;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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