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Linear regression for panel with unknown number of factors as interactive fixed effects

Authors: Hyungsik Roger Roger Moon and Martin Weidner
Date: 21 August 2014
Type: cemmap Working Paper, CWP35/14
DOI: 10.1920/wp.cem.2014.3514

Abstract

In this paper we study the least squares (LS) estimator in a linear panel regression model with unknown number of factors appearing as interactive fixed e ffects. Assuming that the number of factors used in estimation is larger than the true number of factors in the data we establish the limiting distribution of the LS estimator for the regression coefficients, as the number of time periods and the number of crosssectional units jointly go to infi nity. The main result of the paper is that under certain assumptions the limiting distribution of the LS estimator is independent of the number of factors used in the estimation, as long as this number is not underestimated. The important practical implication of this result is that for inference on the regression coefficients one does not necessarily need to estimate the number of interactive fixed eff ects consistently.

Supplementary material for this paper is available here.

 

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Now published:
Hyungsik Roger Roger Moon and Martin Weidner July 2015, Linear regression for panel with unknown number of factors as interactive fixed effects, Journal Article, Wiley Online Library
Previous version:
Hyungsik Roger Roger Moon and Martin Weidner October 2013, Linear regression for panel with unknown number of factors as interactive fixed effects, cemmap Working Paper, CWP49/13, Cemmap

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