# Re: st: two-way error component model

 From "Svetlana Mira " To statalist@hsphsun2.harvard.edu Subject Re: st: two-way error component model Date Fri, 25 Feb 2005 15:17:53 GMT0BST

```Mark,

Svetlana

On 24 Feb 2005 at 19:53, Mark Schaffer wrote:

Svetlana,

Quoting Svetlana Mira  <svetlanam@Cardiff.ac.uk>:

> Dear All,
>
> I have a problem understanding how Stata computes the results for a
> two-way error component model (xi: reg y i.idfirm i.idtime x1) and
> hopefully somebody will be able to help me with this. In the case of
> a fixed effects model, we can obtain the results in Stata either by
> using xtreg, areg or simply based on the demeaned values using
> regress option. Can we apply the last option (demeaning) for the two-
> way error component model? (i.e., can we run a two-way error
> component model based on the mean differences)? If so, what means
> shall we extract?
>
> For instance, if we run xi: reg y i.idfirm i.idtime x1 the obtained
>
> results are not equal to the results based on
>
> regress y x2, where x2=x1-x(meanidfirm)-x(meanidtime)
>
> Or as suggested by Green (1997)
>
> regress y x3, where x3=x1-x(meanidfirm)-x(meanidtime) + x(firm-year
> specific mean).

I am pretty sure that if you check Greene, you'll find that this is the
formula for obtaining the 2-way error components estimate for a balanced
panel using mean deviations.  If the panel is unbalanced, the mean-deviation
approach requires calculations that are somewhat more involved.  Baltagi's
book "Econometric Analysis of Panel Data" has a discussion of this.

Hope this helps.

Cheers,
Mark

> Does Stata use a specific procedure to run a two-way error component
> model different from the ones mentioned above? Any suggestions or
> comments are more than appreciated.
>
> Many thanks for your help,
> Svetlana
>
> *
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>

Prof. Mark Schaffer
Director, CERT
Department of Economics
School of Management & Languages
Heriot-Watt University, Edinburgh EH14 4AS
tel +44-131-451-3494 / fax +44-131-451-3294
email: m.e.schaffer@hw.ac.uk
web: http://www.sml.hw.ac.uk/ecomes

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