Joakim Westerlund

Professor, Programchef - Magisterprogram i Dataanalys och ekonomi

On the Role of the Rank Condition in CCE Estimation of Factor-Augmented Panel Regressions

Författare

Joakim Westerlund
Simon Reese
Hande Karabiyik

Summary, in English

A popular approach to factor-augmented panel regressions is the common correlatedeffects (CCE) estimator of Pesaran (Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica 74, 967–1012, 2006). This paper points to a problem with the CCE approach that appears in the empirically relevant case when the number of factors is strictly less than the number of observables used in their estimation. Specifically, the use of too many observables causes the second moment matrix of the estimated factors to become asymptotically singular, an issue that has not yet been appropriately accounted for. The purpose of the present paper is to fill this gap in the literature.

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