Scribd
Upload
225 views

Panel Data Models: V X U Y V U X Y

Panel data models examine differences across individuals and time periods. A fixed effects model treats individual and time period differences as fixed, allowing intercepts to vary, while a random effects model treats them as random variables. The core difference is that fixed effects models include dummy variables as part of the intercept, while random effects models include them as part of the error term. The Hausman test compares fixed and random effects models, preferring fixed effects if the individual effects are correlated with other regressors.

Uploaded by

deadman71
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
225 views

Panel Data Models: V X U Y V U X Y

Panel data models examine differences across individuals and time periods. A fixed effects model treats individual and time period differences as fixed, allowing intercepts to vary, while a random effects model treats them as random variables. The core difference is that fixed effects models include dummy variables as part of the intercept, while random effects models include them as part of the error term. The Hausman test compares fixed and random effects models, preferring fixed effects if the individual effects are correlated with other regressors.

Uploaded by

deadman71
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

Panel Data Models Panel data models examine group (individual-specific) effects, time effects, or both.

These effects are either fixed effect or random effect. A fixed effect model examines if intercepts vary across groups or time periods, whereas a random effect model explores differences in error variances. A one-way model includes only one set of dummy variables (e.g., firm); while a two way model considers two sets of dummy variables (e.g., firm and year). The core difference between fixed and random effect models lies in the role of dummy variables (Table 1.1). If dummies are considered as a part of the intercept, this is a fixed effect model. In a random effect model, the dummies act as an error term. A dummy variable is a binary variable that is coded to either 1 or zero. It is commonly used to examine group and time effects in regression analysis. Fixed Effect and Random Effect Models Fixed Effect Model Random Effect Model Functional form Yit ( ui ) X it vit Yit X it (ui vit ) Intercepts Varying across groups Constant and/or times Error variances Constant Varying across groups and/or times Slopes Constant Constant Estimation LSDV GLS, FGLS Hypothesis test F test Breusch-Pagan LM test

A fixed group effect model examines group differences in intercepts, assuming the same slopes and constant variance across entities or subjects. Since a group (individual specific) effect is time invariant and considered a part of the intercept, ui is allowed to be correlated to other regressors. A random effect model, by contrast, estimates variance components for groups (or times) and error, assuming the same intercept and slopes. ui is a part of the errors and thus should not be correlated to any regressor; otherwise, a core OLS assumption is violated. Fixed effects are tested by the F test, while random effects are examined by the Lagrange Multiplier (LM) test (Breusch and Pagan 1980). If the null hypothesis is not rejected, the pooled OLS regression is favored. The Hausman specification test (Hausman 1978) compares fixed effect and random effect models. If the null hypothesis that the individual effects are uncorrelated with the other regressors in the model is not rejected, a random effect model is better than its fixed counterpart Hausman (1978) Test: Fixed Effects versus Random Effects The Hausman specification test compares the fixed versus random effects under the null hypothesis that the individual effects are uncorrelated with the other regressors in the model (Hausman 1978). If correlated (H0 is rejected), a random effect model produces biased estimators, violating one of the Gauss-Markov assumptions; so a fixed effect model is preferred.

You might also like