Lecture10_Panel Data_full.pdf - EC4305 Applied Econometrics...

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EC4305 Applied Econometrics Semester 2, AY2017/18 Lecture 10 Panel Data Dr SONG Changcheng 1
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Purpose of the lecture Panel data regression Fixed effects model Random effects model Hausman test 2
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Cross section data Cross section data: many subjects (such as individuals, firms, countries, or regions) at the same point of time 3
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Time series data A time series is a sequence of data points over a time interval. 4
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Panel data Panel data (also known as longitudinal or cross sectional time-series data) is a dataset in which the behavior of entities are observed across time. These entities could be states, companies, individuals, countries, etc. 5
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Data structure 6
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Question Can we use OLS to analyze panel data? Example: We have panel data about 1000 subjects’ monthly income and consumption We would like to analyze the relationship between them 7
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OLS regression Each color represents each person For each person, there are two months data Does OLS make sense? Why? 8 Income Consumption
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Panel regression: fixed effects 9 Income Consumption
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Advantage of Panel Data Individual/firm fixed effects: accounts for heterogeneity and omitted variable problems control for unobserved variables that change across different entities but not across time cultural factors or difference in business practices across companies Time fixed effects: Control for variables that change over time but not across entities National policies, federal regulations, seasonal effects Control variables at different levels of analysis (students, schools, districts, states) suitable for multilevel design 10
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Stata command We focus on two techniques use to analyze panel data: Fixed effects Random effects The Stata command xtset: define panel data structure xtreg: run fixed/random effects. 11
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Stata command Before using xtreg you need to define panel data by using the command xtset. In this case “country” represents the entities or panels ( i ) and “year” represents the time variable ( t ). The note “(strongly balanced)” refers to the fact that all countries have data for all years. If, for example, one country does not have data for one year then the data is unbalanced. Ideally you would want to have a balanced dataset but this is not always the case, however you can still run the model. 12
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Stata command xtset define panel data structure You can use panel data command to do many analysis or draw figures xtline y xtline y, overlay 13
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Recall the example: Omitted variables: high income people might have preference of savings and investment The unobserved individual fixed effects (preference) are correlated with income 14 Income Consumption
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Fixed effects (FE) model Omitted variable is a common problem in OLS In panel data, each entity has its individual characteristics that might be omitted variable Preference for savings and investment might influence the income
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