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Joakim Westerlund. Photo.

Joakim Westerlund

Professor, Programme director – Master of Data Analytics and Business Economics

Joakim Westerlund. Photo.

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

Author

  • 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.

Department/s

  • Department of Economics

Publishing year

2017-03

Language

English

Pages

60-64

Publication/Series

Journal of Econometrics

Volume

197

Issue

1

Document type

Journal article

Publisher

Elsevier

Topic

  • Economics and Business

Keywords

  • Factor-augmented panel regression
  • CCE estimation
  • Moore–Penrose inverse

Status

Published

ISBN/ISSN/Other

  • ISSN: 0304-4076