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Panel Data

learn about panel data , different types of panel data, pooled , random effect , fixed effect, advantage of random effect, random effect vs fixed effect. meo school of research saeed aas khan meo superior university lahore pakistan.

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3K views

Panel Data

learn about panel data , different types of panel data, pooled , random effect , fixed effect, advantage of random effect, random effect vs fixed effect. meo school of research saeed aas khan meo superior university lahore pakistan.

Uploaded by

saeed meo
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Meo School Of Research

East west north or south education is for all.

The term panel data refers to the pooling of observations on a cross-section of


Households, countries, firms, etc. over several time periods (Baltagi).
Panel data, also known as longitudinal data, have both time series and cross-sectional
dimensions.
They arise when we measure the same collection of people or objects over a period of
time.
Econometrically, the setup is

y it x it u it

o
o where yit is the dependent variable, is the intercept term, is a k 1 vector of
parameters to be estimated on the explanatory variables, xit; t = 1, , T;
i = 1, , N.
The simplest way to deal with this data would be to estimate a single, pooled regression
on all the observations together. But pooling the data assumes that there is no
heterogeneity i.e. the same relationship holds for all the data.
A panel data set, while having both a cross-sectional and a time series dimension, differs in some
important respects from an independently pooled cross section. To collect panel data
sometimes called longitudinal datawe follow (or attempt to follow) the same individuals,
families, firms, cities, states, or whatever, across time.
Hsiao (2003) and Klevmarken (1989)

List several benefits from using panel data


Controlling for individual heterogeneity:
Panel data suggests that individuals, firms, states or countries are heterogeneous. Time-series and
cross-section studies not controlling this heterogeneity run the risk of obtaining biased results,
e.g. see Moulton (1986, 1987).
It is often of interest to examine how variables, or the relationships between them, change
dynamically (over time).
By structuring the model in an appropriate way, we can remove the impact of certain forms of
omitted variables bias in regression results.
Panel data give more informative data, more variability, less collinearity among the variables,
More degrees of freedom and more efficiency
Time-series studies are plagued with multicollinearity; for example, in the case of demand for
cigarettes above, there is high collinearity between price and income in the aggregate time series
for the USA. This is less likely with a panel across American states since the cross-section
dimension adds a lot of variability, adding more informative data on price and income. In fact,
the variation in the data can be decomposed into variation between states of different sizes and
characteristics, and variation within states.
Please remember me and my teachers and family in your prayers.
Superior university Lahore Pakistan

Meo School Of Research


East west north or south education is for all.

Panel data are better able to study the dynamics of adjustment.


Cross-sectional distributions that look relatively stable hide a multitude of changes. Spells of
unemployment, job turnover, residential and income mobility are better studied with panels.
Panel data are also well suited to study the duration of economic states like unemployment and
poverty, and if these Panels are long enough; they can shed light on the speed of adjustments to
economic policy Changes.
Panel data are better able to identify and measure effects that are simply not detectable
in pure cross-section or pure time-series data. (prof.Balgati&prof:Gujrati)

Characteristics of panel data


Panel data provide information on individual behavior, both across individuals and over time
they have both cross-sectional and time-series dimensions.
Panel data include N individuals observed at T regular time periods.
Panel data can be balanced when all individuals are observed in all time periods or
unbalanced when individuals are not observed in all time periods
We assume correlation (clustering) over time for a given individual, with independence
over individuals.
o Example: the income for the same individual is correlated over time but it is independent
across individuals.

Panel data types


Short panel: many individuals and few time periods (we use this case in class)
Long panel: many time periods and few individuals
Both: many time periods and many individuals

Variation for the dependent variable and Regressor


Overall variation: variation over time and individuals.
Between variation: variation between individuals.
Within variation: variation within individuals (over time).

Panel data models


Panel data models describe the individual behavior both across time and across
individuals.
There are three types of models: the pooled model, the fixed effects model, and the
random effects model.

Pooled model
The pooled model specifies constant coefficients, the usual assumptions for crosssectional analysis.
This is the most restrictive panel data model and is not used much in the literature.
Individual-specific effects model
We assume that there is unobserved heterogeneity across individuals captured by
Example: unobserved ability of an individual that affects wages.

Please remember me and my teachers and family in your prayers.


Superior university Lahore Pakistan

Meo School Of Research


East west north or south education is for all.

Fixed effects model


The fixed effects model for some variable yit may be written

y it x it i v it
We can think of i as summarizing all of the variables that affect yit cross-sectionally but do
not vary over time for example, the sector that a firm operates in, a person's gender, or the
country where a bank has its headquarters, etc. Thus we would capture the heterogeneity that
is encapsulated in i by a method that allows for different intercepts for each cross sectional
unit.
This model could be estimated using dummy variables, which would be termed the least
squares dummy variable (LSDV) approach.( Introductory Econometrics for Finance Chris
Brooks 2013)
The Random Effects Model

An alternative to the fixed effects model described above is the random effects model,
which is sometimes also known as the error components model.
As with fixed effects, the random effects approach proposes different intercept terms for
each entity and again these intercepts are constant over time, with the relationships
between the explanatory and explained variables assumed to be the same both crosssectionally and temporally.
However, the difference is that under the random effects model, the intercepts for each
cross-sectional unit are assumed to arise from a common intercept (which is the same
for all cross-sectional units and over time), plus a random variable i that varies crosssectionally but is constant over time.
i measures the random deviation of each entitys intercept term from the global
intercept term . We can write the random effects panel model as

y it x it it

it i v it

Unlike the fixed effects model, there are no dummy variables to capture the heterogeneity
(variation) in the cross-sectional dimension.
Instead, this occurs via the i terms.
Fixed or Random Effects?
It is often said that the random effects model is more appropriate when the entities in the
sample can be thought of as having been randomly selected from the population, but a
fixed effect model is more plausible when the entities in the sample effectively constitute
the entire population.
Please remember me and my teachers and family in your prayers.
Superior university Lahore Pakistan

Meo School Of Research


East west north or south education is for all.

However, the random effects approach has a major drawback which arises from the fact
that it is valid only when the composite error term it is uncorrelated with all of the
explanatory variables.
This can also be viewed as a consideration of whether any unobserved omitted variables
(that were allowed for by having different intercepts for each entity) are uncorrelated
with the included explanatory variables. If they are uncorrelated, a random effects
approach can be used; otherwise the fixed effects model is preferable.
A test for whether this assumption is valid for the random effects estimator is based on a
slightly more complex version of the Hausman test.
If the assumption does not hold, the parameter estimates will be biased and inconsistent.
To see how this arises, suppose that we have only one explanatory variable, x2it that varies
positively with yit, and also with the error term, it. The estimator will ascribe all of any
increase in y to x when in reality some of it arises from the error term, resulting in biased
coefficients

The main question is whether the individual-specific effects are correlated with the Regressor. If
they are correlated, we have the fixed effects model. If they are not correlated, we have the
random effects model.

Fixed effect model verses random effect model


Fixed effect

Random effect

Correlation between the individual, or crosssection specific, error component i and the X
Regressor. i (error component) and the Xs
are correlated, FEM may be appropriate
If T (the number of time series data) is large
and N (the number of cross-sectional units) is
small, FEM may be preferable
If the individual error component i and one or
more Regressor are correlated, then the ECM
estimators are biased

If they are not correlated, we have the random


effects model.

When N is large and T is small, then ECM is


appropriate
If the individual error component i and one or
more Regressor are correlated, then the ECM
estimators are biased, whereas those obtained
from FEM are unbiased.

Best of luck. Soon ill update this file and elaborate further this topic, because of still Im in
learning process.

Please remember me and my teachers and family in your prayers.


Superior university Lahore Pakistan

Meo School Of Research


East west north or south education is for all.

Thanks for being with me


Take care
www.saeedmeo.blogspot.com
[email protected]

1/24/2016

Please remember me and my teachers and family in your prayers.


Superior university Lahore Pakistan

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